S-1/A 1 ds1a.htm AMENDMENT NO 2 TO FORM S-1 FOR PROVIDE COMMERCE, INC. Amendment No 2 to Form S-1 for Provide Commerce, Inc.
Table of Contents

As filed with the Securities and Exchange Commission on June 29, 2004

Registration No. 333-116213

 


 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 


 

PROVIDE COMMERCE, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware   5961   84-1450019

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

5005 Wateridge Vista Drive

San Diego, California 92121

(858) 638-4900

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


 

William Strauss

Chief Executive Officer

PROVIDE COMMERCE, INC.

5005 Wateridge Vista Drive

San Diego, California 92121

(858) 638-4900

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 


 

Copies to:

Faye H. Russell, Esq.

Latham & Watkins LLP

12636 High Bluff Drive, Suite 300

San Diego, California 92130

(858) 523-5400

 

Thomas J. Leary, Esq.

O’Melveny & Myers LLP

610 Newport Center Drive, 17th Floor

Newport Beach, California 92660

(949) 760-9600

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨                 

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨                 

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨                 

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨                 

 


 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

 



Table of Contents

CALCULATION OF REGISTRATION FEE

 

 


Title of each Class of

Securities to be Registered

   Amount
to be
Registered(1)
   Proposed
Maximum
Offering Price
Per Unit(2)
   Proposed
Maximum
Aggregate
Offering Price(2)
   Amount of
Registration
Fee(1)(2)

Common Stock, par value $.001 per share

   2,278,172    $20.47    $50,967,784.81    $6,458

(1) Includes shares of common stock that the underwriters have the option to purchase from the selling stockholders solely to cover over-allotments, if any.

(2) In connection with its initial filing on Form S-1 on June 4, 2004, the Registrant paid a filing fee of $6,317 with respect to the registration of 2,223,469 shares of its common stock with a proposed maximum aggregate offering price of $49,850,174.98 (estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 based upon the average of the high and low prices of the common stock as reported on the Nasdaq National Market on June 2, 2004). In connection with the filing of Amendment No. 1, the Registrant transmitted the additional filing fee of $7.97 payable with respect to the 3,177-share increase in the amount to be registered, representing a proposed maximum aggregate offering price for such share increase of $62,872.83 (estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) under the Securities Act based upon the average of the high and low prices of the common stock as reported on the Nasdaq National Market on June 16, 2004). Concurrent with the filing of this Amendment No. 2, the Registrant has transmitted $134, representing the additional filing fee payable with respect to the 51,526-share increase in the amount to be registered, representing a proposed maximum aggregate offering price for such share increase of $1,054,737 (estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) under the Securities Act based upon the average of the high and low prices of the common stock as reported on the Nasdaq National Market on June 28, 2004).


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Dated June 29, 2004

 

1,981,019 Shares

 

LOGO

 

Common Stock

 

We are selling 100,000 shares of our common stock. The selling stockholders are offering 1,881,019 shares of common stock. Our common shares are listed on the Nasdaq National Market under the symbol “PRVD.” On June 28, 2004, the last reported sale price of our common stock was $20.16 per share.

 

Our business and an investment in our common stock involve significant risks. These risks are described under the caption “ Risk Factors” beginning on page 9 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 


 

     Per Share

   Total

Public offering price

   $                     $                 

Underwriting discounts and commissions

   $      $  

Proceeds, before expenses, to us

   $      $  

Proceeds, before expenses, to selling stockholders

   $      $  

 

The underwriters may also purchase up to 297,153 shares of our common stock from the selling stockholders at the public offering price, less underwriting discounts and commissions, to cover over-allotments, if any. We will not receive any of the proceeds of the sale of shares by the selling stockholders.

 

The underwriters expect to deliver the shares in New York, New York on                 , 2004.

 

 

Joint Book-Running Managers

 

SG Cowen & Co.    Deutsche Bank Securities
Morgan Keegan & Company, Inc.    Pacific Crest Securities
Roth Capital Partners     

 

                    , 2004.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page
Prospectus Summary    1
Risk Factors    9
Forward-Looking Statements    27
Use of Proceeds    28

Price Range of our Common Stock and Dividend Policy

   28
Capitalization    29
Dilution    30
Selected Consolidated Financial Data    32

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   34
     Page
Business    50
Management    63
Related Party Transactions    81
Principal and Selling Stockholders    85
Description of Capital Stock    88
Shares Eligible for Future Sale    93
Underwriting    96
Legal Matters    99
Experts    99

Where You Can Find Additional Information

   99
Index to Consolidated Financial Statements    F-1

 


 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information that is different. We are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 



Table of Contents

PROSPECTUS SUMMARY

 

This summary highlights the information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common shares. Before you decide to invest in our common stock, you should read the entire prospectus carefully, including the “Risk Factors” and consolidated financial statements and related notes included in this prospectus.

 

The Company

 

We operate an e-commerce marketplace of websites for perishable goods that consistently delivers fresh, high-quality products direct from the supplier to the customer at competitive prices. We combine an online storefront, proprietary supply chain management technology, established supplier relationships and an integrated logistical relationship with Federal Express Corporation to create a market platform that bypasses traditional supply chains of wholesalers, distributors and retailers. The benefits to our customers include freshness, quality, price and selection, all with a guaranteed delivery date. The benefits to our suppliers include enhanced margins, broader customer reach and better inventory management. We believe our business model is highly scalable with low capital investment requirements and minimal inventory carrying costs.

 

Our marketplace is a collection of our own branded websites and websites that we operate for other retailers, each offering high-quality perishable products shipped directly from the supplier to the customer. By using our market platform to eliminate multiple intermediaries from the traditional product supply chain, we are able to purchase products directly from suppliers at lower prices and reduce or eliminate many of the typical costs associated with traditional retail businesses, including inventory, capital expenditures, labor and administrative expenses. We believe this allows us to achieve higher operating margins than many of our competitors. We have designed our technology infrastructure to be highly scalable and adaptable to different categories of time-sensitive shipments, including perishable products.

 

We initially launched our marketplace in 1998 to sell and deliver flowers, one of the most difficult perishable products to ship, under our Proflowers brand at www.proflowers.com. Our flowers are generally seven or more days fresher than flowers delivered via the traditional floral supply chain. We guarantee that our flowers will reach their destination on the requested delivery date. We believe our global network of growers, proprietary technology and integrated relationship with Federal Express Corporation, or FedEx, provide us with competitive advantages in the online floral market. Our price points start at $29.99, and in most instances are significantly lower than other online floral merchants for comparable items, yet we believe we offer a higher quality and fresher product at higher margins.

 

To date, we have derived our revenues primarily from the sale of flowers, plants and gifts on our proflowers.com website. For the nine months ended March 31, 2004, we reported net sales of $76.9 million, an increase of 41.3% from the nine months ended March 31, 2003, and net income of $15.4 million as compared to a net loss of ($0.2) million in the same period in the prior year. During the nine months ended March 31, 2004, we reassessed the valuation allowance previously established against our net deferred tax assets and released the remaining allowance of approximately $12.2 million, resulting in the recognition of a tax benefit of $11.8 million. For the fiscal year ended June 30, 2003, we reported net sales of $88.7 million, an increase of 26.2% from the prior year, and net income of $4.3 million. Since our inception, we have incurred significant losses. As of March 31, 2004, we have an accumulated deficit of $35.1 million. Our database of customers has grown from approximately 69,000 as of June 30, 1999 to approximately 2.7 million as of March 31, 2004. In the nine months ended March 31, 2004, 54.3% of our total orders placed came from repeat customers. In the fiscal year ended June 30, 2003, 53.1% of our total orders placed came from repeat customers.

 

1


Table of Contents

We have designed our e-commerce marketplace specifically around the way consumers shop for time-sensitive and perishable products. Our branded websites are designed to streamline the order process by minimizing the time and number of web pages a customer views when searching for or placing an order. In contrast to many other e-commerce shopping experiences, our order process begins with the selection of a specific delivery time window. Our marketplace automatically considers supplier inventory levels before displaying any product or shipping date to prevent “out of stock” or back-order scenarios and to allow us to provide our customers with greater assurance that the package will arrive for the intended occasion. Our customers receive three automatically generated confirmation emails—one each at the time of order, product shipment and package delivery.

 

We plan to assess and target additional categories based on our market platform’s ability to add value by streamlining the supply chain for the benefit of customers and suppliers. We have identified premium meat and fresh fruit as initial categories where we believe we can leverage our customer base, marketing and distribution relationships and infrastructure. In October 2003, we launched and are now operating Uptown Prime at www.uptownprime.com, offering premium meats, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium fruits. In addition, in March 2004, we began testing a premium seafood merchandising extension within Uptown Prime, called Uptown Catch. To support the launch of additional categories and merchandising extensions, we have engineered our system to support peak loads in excess of 50 times our current average daily volumes and have managed peak shipment days of over 184,000 orders.

 

We believe our market platform can be tailored for use by any business desiring to offer high-quality, perishable products to its customers. To validate this belief, we have entered into multi-year agreements with two Fortune 100 retailers and a company that creates content and domestic merchandise for homemakers and other consumers to use our market platform to sell products under their brand names. Under these arrangements, we design and host a dedicated website for selling perishable goods, handling all order processing and fulfillment and providing customer service. We are not dependent on these arrangements and they represent an immaterial percentage of our net sales in fiscal 2003 and for the nine months ended March 31, 2004.

 

We have developed rigorous quality assurance procedures in our flower business which we believe we can apply to other perishable products. In the floral category, we work closely with our global network of growers and distribution facilities to ensure that our quality assurance standards are implemented throughout cultivation, harvesting, packing, inspection and transportation. In addition to systematic inspections, lab testing, training manuals and on-site quality assurance personnel, our quality initiatives rely on detailed product tracking that allows us to trace any issue resulting in customer dissatisfaction back to the supplier, specific product and time of shipment for correction of the cause.

 

Provide Commerce’s objective is to become our customers’ preferred e-commerce marketplace for the delivery of perishable products direct from the supplier. Our long-term strategy is to deploy this market platform across multiple products and brands through our own websites and websites that we design and operate for other retailers. We believe this will result in increased operating leverage by allowing us to use our common customer base, marketing and distribution relationships and infrastructure across the entire marketplace. We plan to attain this goal through the following key strategies:

 

    expand the Provide Commerce marketplace by expanding the type and number of product offerings on our own websites and pursuing additional relationships and product offerings with other retailers;

 

    increase our brand awareness through a variety of online and offline marketing and promotional programs;

 

2


Table of Contents
    continue to acquire and retain customers through online and offline marketing activities, ongoing modification of our website and its offerings and continued contact with our customer base through email, direct mail and other channels;

 

    continue to establish strong relationships with our existing suppliers and to add new suppliers to provide a broad selection of quality products;

 

    expand distribution initiatives by continuing to work closely with FedEx and updating our systems and distribution processes; and

 

    grow our relationships with retailers and other third parties who want to sell perishable products online.

 

Jared Schutz Polis, Dr. Stephen Schutz and Jordanna Schutz and persons affiliated with each of them will hold approximately 36.7% of our outstanding stock upon the closing of this offering, assuming exercise of the underwriters’ over-allotment option in full and the sale by Mr. Polis and persons affiliated with him of 1,425,000 shares in this offering. Mr. Polis, Dr. Schutz and Ms. Schutz and these affiliated persons will have the ability to exert significant influence over our management.

 

Recent Developments

 

Since our initial public offering in December 2003, we have accomplished the following:

 

Accelerated our revenue and pre-tax income growth over comparable periods.    For the nine months ended March 31, 2004, revenues increased 41.3% to $76.9 million, from $54.4 million during the same period of fiscal 2003 and pre-tax income increased to $3.6 million from a loss of $0.2 million during the same period of fiscal 2003.

 

Exhibited strong performance during core holiday seasons.    On May 11, 2004, we reported record shipments for the Mother’s Day shopping period defined as shipments from the beginning of May through the Saturday of Mother’s Day weekend. During this period, shipments for our core consumer floral business were more than 550,000, compared to approximately 380,000 shipments in the Mother’s Day period a year ago. On February 17, 2004, we reported record shipments for the Valentine’s Day shopping period defined as February 8th through February 14th. During the period, shipments for our core consumer floral business were more than 400,000, compared to approximately 304,000 in the Valentine’s period a year ago.

 

Achieved strong results in our new product categories.    The launch of our Uptown Prime and Cherry Moon Farms websites was the first application of our business model to product categories outside of floral products. Since the launch, we have grown sales in both websites. These new business initiatives are currently an immaterial part of our business. We expect them to account for approximately 1.5% of revenues for the fiscal year ending June 30, 2004. In addition, in March 2004, we began testing a premium seafood merchandising extension within Uptown Prime, called Uptown Catch.

 

Improved and utilized new marketing initiatives.    We have introduced new targeted online and offline marketing initiatives including the more frequent distribution of catalogs and an increased focus on our non-seasonal business. We believe this has allowed us to retain existing customers, demonstrated by the increase of 43.3% in the number of orders placed by existing customers from 561,000 in the nine months ended March 31, 2003 to 804,000 in the nine months ended March 31, 2004. We have also continued to focus on the acquisition of new customers, demonstrated by the increase of 40.8% in the number of new customers purchasing products from 414,000 in the nine months ended March 31, 2003 to 583,000 in the same period during 2004.

 

Continued to seek ways to optimize and refine our distribution and delivery methods.    We continually evaluate our distribution and delivery methods to improve cost effectiveness and efficiency, including the introduction of the use of FedEx Ground in early 2004. We also look to expand and diversify our delivery methods and relationships over time to improve customer satisfaction.

 

3


Table of Contents

Company Information

 

Our business was incorporated in Delaware in February 1998 as ProFlowers, Inc. We changed our name to Provide Commerce, Inc. in September 2003. Our principal executive offices are located at 5005 Wateridge Vista Drive, San Diego, California 92121. Our telephone number is (858) 638-4900. Our corporate website is located at www.providecommerce.com. Our branded flower website is located at www.proflowers.com and our additional branded websites are located at www.uptownprime.com and www.cherrymoonfarms.com. The information contained on our branded websites is not part of this prospectus.

 

4


Table of Contents

The Offering

 

Common stock we are offering

   100,000 shares

Common stock and warrants the selling

stockholders are offering

  

1,841,764 shares or 2,128,793 shares if the underwriters exercise their over-allotment option in full. In addition, the underwriters will purchase a warrant exercisable into 39,255 shares of common stock from a selling stockholder (49,379 shares of common stock if the over-allotment option is exercised in full), pay us the exercise price specified in the warrant to obtain these shares and sell the shares in this offering.

Common stock to be outstanding after the offering

   11,656,115 shares

Use of proceeds

   We intend to use the net proceeds from this offering for general corporate purposes, including paying expenses in connection with this offering. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

Nasdaq National Market symbol

   PRVD

Dividend policy

   We do not intend to pay dividends on our common stock in the foreseeable future. See “Dividend Policy.”

 

The number of shares of common stock to be outstanding after this offering is based on 11,419,615 shares of common stock issued and outstanding as of March 31, 2004. Except where we state otherwise, the common stock information we present in this prospectus:

 

    is based on shares outstanding, and excludes, as of March 31, 2004:

 

    964,465 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $4.27 per share;

 

    2,207,209 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $3.45 per share; and

 

    2,036,619 shares of common stock available for future issuance under our existing equity incentive plans, from which options to purchase up to 92,350 shares of common stock at a weighted average exercise price of $21.92 per share have been granted for the period from April 1, 2004 to June 28, 2004; and

 

    assumes no exercise of stock options or warrants after March 31, 2004, other than the exercise of options and warrants exercisable for 136,500 shares of common stock at a weighted average exercise price of $1.27 per share in connection with this offering (163,026 shares if the over-allotment option is exercised in full).

 

5


Table of Contents

Provide Commerce, Proflowers®, Uptown Prime, Uptown Catch, Cherry Moon Farms, Freshness Factor®, and a flower logo are trademarks of Provide Commerce, Inc. We have trademark rights in these marks in the U.S. and have registrations issued or applications pending for the marks in the U.S. We also have registrations issued or applications pending for the trademark Proflowers® in Australia, Brazil, Canada, the European Union, Japan, Mexico, New Zealand and Switzerland. This prospectus also refers to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective owners.

 

This prospectus contains market data and industry forecasts that were obtained from independent industry and government publications.

 

6


Table of Contents

Summary Consolidated Financial Data

(in thousands, except share and per share data)

 

The following tables summarize our consolidated financial data for the periods presented. You should read the following financial information together with the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     Fiscal Year Ended June 30,

   

Nine Months Ended

March 31,


 
     2001

    2002

    2003

    2003

    2004

 
                       (unaudited)  

Consolidated Statement of Operations Data:

                                

Net sales

   $ 45,730     $ 70,245     $ 88,684     $ 54,445     $ 76,917  

Cost of sales

     27,095       40,328       49,996       31,292       42,239  
    


 


 


 


 


Gross profit

     18,635       29,917       38,688       23,153       34,678  

Operating expenses:

                                        

Selling and marketing

     14,676       15,060       18,673       12,173       16,968  

General and administrative

     7,094       9,719       11,187       7,907       10,109  

Information technology systems

     4,016       3,963       3,565       2,536       2,900  

Amortization of goodwill

     6,754       —         —         —         —    

Stock-based compensation

     1,741       483       411       311       1,304  
    


 


 


 


 


Total operating expenses

     34,281       29,225       33,836       22,927       31,281  
    


 


 


 


 


Operating income (loss) from continuing operations

     (15,646 )     692       4,852       226       3,397  

Minority interest in loss of consolidated subsidiary

     298       —         —         —         —    

Other income (expense), net

     267       (357 )     (183 )     (422 )     186  
    


 


 


 


 


Income (loss) from continuing operations before income tax

     (15,081 )     335       4,669       (196 )     3,583  

Income tax provision (benefit)

     —         —         337       —         (11,768 )
    


 


 


 


 


Income (loss) from continuing operations

     (15,081 )     335       4,332       (196 )     15,351  

Loss from discontinued operations

     (797 )     (643 )     —         —         —    
    


 


 


 


 


Net income (loss)

     (15,878 )     (308 )     4,332       (196 )     15,351  

Preferred stock dividend

     —         —         —         —         (1,500 )
    


 


 


 


 


Net income (loss) attributable to common stockholders

   $ (15,878 )   $ (308 )   $ 4,332     $ (196 )   $ 13,851  
    


 


 


 


 


Income (loss) per share from continuing operations:

                                        

Basic

   $ (2.98 )   $ 0.06     $ 0.76     $ (0.03 )   $ 1.93  

Diluted

   $ (2.98 )   $ 0.03     $ 0.39     $ (0.03 )   $ 1.28  

Loss per share from discontinued operations:

                                        

Basic

   $ (0.16 )   $ (0.12 )   $ —       $ —       $ —    

Diluted

   $ (0.16 )   $ (0.12 )   $ —       $ —       $ —    

Net income (loss) per common share:

                                        

Basic

   $ (3.14 )   $ (0.06 )   $ 0.76     $ (0.03 )   $ 1.74  

Diluted

   $ (3.14 )   $ (0.06 )   $ 0.39     $ (0.03 )   $ 1.16  

Weighted average common shares outstanding:

                                        

Basic

     5,057,787       5,248,964       5,682,518       5,695,123       7,967,690  
    


 


 


 


 


Diluted

     5,057,787       9,609,344       11,206,693       5,695,123       11,966,640  
    


 


 


 


 


 

7


Table of Contents
     As of March 31, 2004

     Actual

   As Adjusted

     (unaudited)

Consolidated Balance Sheet Data:

             

Cash and cash equivalents

   $ 51,784    $ 53,357

Working capital

     38,913      40,486

Total assets

     74,963      76,536

Total stockholders’ equity

     56,976      58,549

 

The table above summarizes our balance sheet at March 31, 2004:

 

    on an actual basis; and

 

    on an as adjusted basis to give effect, after deducting estimated underwriting discounts and commissions and our estimated offering expenses, to:

 

    the sale of 100,000 shares of common stock offered by us at an assumed public offering price of $20.16 per share, the last reported sale price on June 28, 2004; and

 

    the exercise of options and warrants exercisable for 136,500 shares of common stock at a weighted average exercise price of $1.27 per share in connection with this offering.

 

8


Table of Contents

RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In addition, there may be other risks of which we are currently unaware or that we do not currently believe are material that could become important factors that harm our business, financial condition or results of operations. In any of such cases, the trading price of our common stock could decline, and you may lose all or part of your investment. Throughout this prospectus, our fiscal years ended June 30, 2001, June 30, 2002 and June 30, 2003 may be referred to as fiscal 2001, fiscal 2002 and fiscal 2003, respectively.

 

Risks Related to Our Business

 

Our quarterly operating results may fluctuate significantly. You should not rely on them as an indication of our future results.

 

Our future revenues and results of operations may fluctuate significantly from quarter to quarter due to a combination of factors, many of which are outside of our control. The most important of these factors include:

 

    seasonality;

 

    the timing and effectiveness of marketing programs;

 

    our ability to enter into and renew key corporate and strategic partnerships;

 

    our ability to enter into or renew key marketing arrangements;

 

    our ability to compete with traditional and Internet retailers;

 

    the ability of us and our competitors to deliver high-quality perishable products to customers in a timely manner;

 

    the condition of the retail economy; and

 

    the timing and effectiveness of capital expenditures.

 

We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall resulting from any of these or other factors. If we have a shortfall in revenue in relation to our expenses, our operating results will suffer. Our operating results for any particular period may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of our future performance. In future periods, it is possible that our results of operations may be below the expectations of public market analysts and investors. This could cause the trading price of our common stock to fall.

 

We achieved annual net income for the first time during fiscal 2003, and we cannot assure you we will continue to operate profitably.

 

We achieved annual net income for the first time in our corporate history during fiscal 2003. We may not be able to continue to achieve positive net income in future fiscal years, especially as we introduce new product categories. We expect our operating expenses to increase in the future, as we, among other things:

 

    expand into new product categories and accessories for our existing product lines;

 

    continue with our marketing efforts to build our brand names;

 

    expand our customer base;

 

    establish research and development efforts to advance our proprietary supply chain technology and develop new technology;

 

9


Table of Contents
    upgrade our operational and financial systems, procedures and controls;

 

    continue to absorb the costs and implement the responsibilities of being a public company; and

 

    retain existing personnel and hire additional personnel.

 

After investment in items including those described above, we expect to maintain profitability for fiscal 2004 and for the foreseeable future, although no assurances can be made that we will be profitable. In order to maintain profitability as we expand into new product categories, we will need to generate revenues exceeding historical levels and/or reduce relative operating expenditures. We do not have significant experience offering product categories other than flowers. We may not be able to generate the required revenues from flowers and other perishable products or reduce operating expenses sufficiently to sustain or increase operating profitability. If we have a shortfall in revenue without a corresponding reduction to our expenses, our operating results may suffer. It is possible that results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of our common stock to fall.

 

We have operated our flower category for approximately five years and our premium meat and fresh fruit categories for less than nine months. This limited operating history makes evaluating our business and its prospects difficult.

 

We have a limited operating history on which an investor can evaluate our business. We were incorporated in February 1998 and officially launched our website, www.proflowers.com, in August 1998. We have generated substantially all of our revenues during the past five years from the sale of flowers. We began selling premium meat and fresh premium fruit in October 2003. An investor in our common stock must consider the risks, uncertainties and difficulties frequently encountered by companies in new and rapidly evolving online retail markets such as these we have targeted. If we do not successfully manage these risks or successfully execute our business strategy, our business, results of operations and financial condition will be adversely affected.

 

Utilization of our deferred tax assets is dependent on future taxable income.

 

We have a federal tax net operating loss carryforwards at June 30, 2003 of approximately $36 million, which represents a substantial amount of our deferred tax assets. In calculating our tax provision, and assessing the likelihood that we will be able to utilize the deferred tax assets, we have considered and weighed all of the evidence, both positive and negative, and both objective and subjective. We have factored in the inherent risk of forecasting revenue and expenses over an extended period of time. We have also considered the potential risks associated with our business, as outlined in other risk factors in this prospectus, and have taken into account material permanent differences in the treatment of revenue and expenses for purposes of financial reporting and tax accounting, such as the treatment of stock options, limitation on meals and entertainment and stock based compensation.

 

Based on current information, and sufficient positive evidence, particularly the fact that we have reported taxable income for the past two fiscal years, generated taxable income through the first nine months of this fiscal year, and forecasted future book and tax income, we reversed the valuation allowance during the nine months ended March 31, 2004. Although we anticipate generating future taxable income, we cannot guarantee that we will generate sufficient taxable income to fully utilize our deferred tax assets.

 

If our customers do not find our expanded product categories appealing or if we are unable to successfully leverage our business strategy into our new product categories, our business may suffer.

 

We are planning to expand our product lines into other categories of perishable goods. For example, in October 2003 we launched and are now operating Uptown Prime offering premium meats and Cherry Moon Farms offering fresh premium fruits. In addition, in March 2004, we began testing a premium seafood merchandising extension within Uptown Prime, called Uptown Catch. In expanding our categories, we intend to

 

10


Table of Contents

leverage our e-commerce platform, marketing and shipping relationships and customer base to develop these perishable product opportunities for us and other retailers using our platform to offer perishable products. While our market platform has been incorporated into and tested in the online floral retail market, we cannot predict whether it can be successfully applied to other perishable product categories. In addition, expansion of our business strategy into new product categories will require us to incur significant marketing expenses, develop relationships with new suppliers and comply with new regulations. These requirements could strain our management, financial and operational resources. Additional challenges that may affect our ability to expand into new product categories include our ability to:

 

    establish or increase awareness of our new brands and product categories;

 

    acquire, attract and retain customers at a reasonable cost;

 

    achieve and maintain a critical mass of customers and orders across all of our product categories;

 

    maintain or improve our gross margins and fulfillment costs;

 

    compete effectively in highly competitive markets for the sale of perishable goods online;

 

    attract and retain suppliers to provide our expanded line of perishable products to our customers on terms that are acceptable to us; and

 

    establish ourselves as an important participant in the market for perishable products, such as premium meat and fresh fruit.

 

We cannot be certain that we will be able to successfully address any or all of these challenges in a manner that will enable us to expand our business into new product categories in a cost-effective or timely manner. If our new product categories are not received favorably by consumers, our reputation and the value of the applicable new brand and our other brands could be damaged. The lack of market acceptance of our new product categories or our inability to generate satisfactory revenues from any expanded product categories to offset their cost could harm our business.

 

We depend on a single third-party carrier, and the failure of this carrier to deliver our product offerings in a timely or accurate manner could harm our business.

 

We currently rely exclusively on a single third-party carrier, FedEx, for shipments of our products to customers. We are therefore subject to the risks, including capacity and volume constraints, security concerns, employee strikes or other labor stoppages, inclement weather, equipment failures or other delays and fluctuations in fuel costs, associated with FedEx’s ability to provide timely and cost-effective order fulfillment and delivery services to meet our distribution and shipping needs. Under our contract with FedEx, we have agreed to waive specified refunds and guarantees for service failures and for commitment times during our seasonal peak periods in exchange for favorable pricing on our shipments with FedEx. Failure to deliver products to our customers in a timely and accurate manner would harm our reputation, our brands and our results of operations.

 

Our contract with FedEx provides us with negotiated shipment rates for all FedEx services other than FedEx First Overnight and FedEx’s freight services. Our contract with FedEx provides for annual renewal and annual pricing adjustments, based upon FedEx’s guideline rates, and permits either FedEx or us to terminate the agreement upon 60 days prior notice. We re-negotiate various provisions of our agreement with FedEx on an annual basis. If in the future we fail to negotiate rates or other terms as favorable to us as the existing terms of our agreement, such failure will adversely affect our business and results of operations. In addition, if for any reason FedEx is unable or unwilling to deliver products to our customers in a timely manner or on acceptable terms, we may not be able to secure alternative shipping partners on acceptable terms in a timely manner, or at all.

 

11


Table of Contents

We depend on three suppliers for approximately 43% of our flower products, and the loss of any of these suppliers could harm our business.

 

We depended upon three suppliers for 42.7% of our flower products for the nine months ended March 31, 2004 and 45.4% of our flower products for fiscal year 2003. If any one of these three flower suppliers were to become unable or unwilling to continue to supply flowers to our customers, our business could be harmed. Our arrangements with our flower suppliers for order fulfillment may be discontinued by the suppliers at any time. If a flower supplier discontinues its relationship with us, we will be required to obtain a suitable replacement, which may cause delays in delivery or a decline in product quality, leading to customer dissatisfaction and loss of customers. We expect to encounter similar risks as we develop our premium meat and fruit and other perishable product supplier relationships.

 

If our marketing efforts are not effective, our brands may not achieve the broad recognition necessary to succeed.

 

We believe that broader recognition and a favorable consumer perception of our brands, including our Provide Commerce, Proflowers, Uptown Prime and Cherry Moon Farms brands, are essential to our future success. Accordingly, we intend to pursue an aggressive brand-enhancement strategy through a variety of online and offline marketing and promotional techniques, involving the Internet, print, radio, email, direct mail, public relations and television. These initiatives will involve significant expense. If our brand enhancement strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future revenues. Successful positioning of the Provide Commerce, Proflowers, Uptown Prime and Cherry Moon Farms brands will largely depend on:

 

    the success of our advertising and promotional efforts;

 

    our ability to provide a consistent, high-quality customer experience; and

 

    our ability to continue to provide high-quality products to our customers in a timely manner.

 

Due to the change in our corporate name in September 2003 and expansion of our product categories in October 2003, our Proflowers brand is our only brand that has received broader recognition by customers who associate it with our www.proflowers.com website and the sale of flowers and floral products. To increase awareness of our new corporate name and brands and our other proposed brands and product offerings, we will need to continue to spend significant amounts on advertising and promotions. These expenditures may not result in a sufficient increase in revenues to cover such advertising and promotional expenses. In addition, even if brand recognition increases, the number of new customers or the number of transactions on our branded websites may not increase. Also, even if the number of new customers increases, those customers may not purchase products through our branded websites on a regular basis.

 

We have historically experienced seasonality in our business, which we expect to continue and which could cause our operating results to fluctuate.

 

We have historically experienced seasonality in our Proflowers business due to the nature of our products, and we expect this seasonality to continue. Our revenues and earnings are generally lowest in the third calendar quarter, our first fiscal quarter. Sales of our products are highly concentrated in the first calendar quarter, due to Valentine’s Day, the second calendar quarter, due to Mother’s Day and Easter, and the fourth calendar quarter, due to the Thanksgiving and end-of-year holidays. In anticipation of increased sales activity during these periods, we utilize a significant number of temporary employees to supplement our permanent staff. We also increase our inventory levels at our distribution facilities. If revenues during these periods do not meet our expectations, we may not generate sufficient revenues to offset these increased costs and our operating results may suffer.

 

The launch of our new branded websites targeting premium meat and fresh fruit makes it difficult for us to assess the impact of seasonal factors on our business in the future. We expect that our new product categories will also be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and

 

12


Table of Contents

services offered by our new branded websites and seasonality patterns affecting Internet use generally. For example, demand for our current and new product offerings is likely to increase during holiday periods, such as Father’s Day and Christmas, while Internet use in general may decline during the summer months. Our results may also be affected by seasonal fluctuations in the products made available to us for sale by participating suppliers. Cyclical variations for new products we plan to offer may either smooth or increase our existing seasonality. Unanticipated fluctuations in seasonality could adversely affect our operating results and cause us to miss our internal and third-party earnings projections, which could cause our stock price to decline.

 

We face intense competition from both traditional and online retail companies with greater brand recognition and resources, which may adversely affect our business.

 

The e-commerce market segments in which we currently compete are intensely competitive, and we have many competitors in different industries. The products we offer can be purchased at supermarkets and warehouse stores as well as specialty markets. Our floral competitors include traditional florists, catalog and online floral providers and floral wire services such as FTD, 1-800-FLOWERS and Teleflora. In the premium meat and seafood category, we believe our competitors include specialty butchers, mail order companies, seafood specialty catalogs and other online premium meat providers, such as Omaha Steaks Company. We believe competitors in the fresh fruit category include local farmers’ markets and specialty catalog companies, such as Harry & David. Additionally, we compete with specialty food companies and general gift companies.

 

Competition in the e-commerce channel may intensify, especially as we expand into product categories in addition to flowers. The nature of the Internet as an electronic marketplace facilitates competitive entry and comparison shopping and renders it inherently more competitive than conventional retailing formats. This increased competition may reduce our ability to expand our business, and thus reduce our sales and operating profits, or both.

 

Many of our current and potential competitors enjoy substantial competitive advantages, including:

 

    greater name recognition;

 

    a longer operating history;

 

    a more extensive customer base;

 

    broader product and service offerings; and

 

    greater resources for competitive activities, such as sales and marketing, research and development, strategic acquisitions, alliances and joint ventures.

 

As a result, these current and potential competitors may be able to secure merchandise from suppliers on more favorable terms, and may be able to adopt more aggressive pricing policies. Other companies in the retail and e-commerce service industries may enter into business combinations or alliances that strengthen their competitive positions. These business combinations or alliances might prevent them from also entering into relationships with us or prevent us from taking advantage of such combinations or alliances. They also may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Intense competition may lead to:

 

    price reductions, decreased revenues and lower profit margins;

 

    loss of market share; or

 

    increased marketing expenditures.

 

Failure to provide our customers with high-quality products and customer service may harm our brand and cause our revenues to decline.

 

We believe that our success in promoting and enhancing our brands will depend on our success in providing our customers high-quality products and a high level of customer service. Product orders placed by our

 

13


Table of Contents

customers are fulfilled by our third-party suppliers. We work with our suppliers to develop best practices for quality assurance; however, we do not directly or constantly control any of our suppliers. If our suppliers do not fulfill orders to our customers’ satisfaction, our customers may not shop with us again. In addition, because we do not have constant, direct control over these third-party suppliers, interruptions or delays in the products they supply may be difficult to remedy in a timely fashion. If any of our suppliers is incapable of or unwilling to fulfill our product orders, we will attempt to ship the products from another source to guarantee right-day delivery; however, we may not be able to ship the products from an alternate source in a timely manner or at all. Furthermore, we depend on our customer service department to respond to our customers should they have questions or problems with their orders. During peak periods, we also rely on temporary employees and outsourced staff to respond to customer inquiries. Temporary employees and outsourced staff may not have the same level of commitment to our customers as our full-time employees. If our customers are dissatisfied with the quality of the products or the customer service they receive, or if we are unable to deliver products to our customers in a timely manner or at all, our customers may stop purchasing products in the related category from us. Also, they may choose not to purchase products from another of our product categories, which could adversely affect our business and results of operations.

 

We are dependent on our strategic relationships to help promote our branded websites and expand our product offerings; if we fail to maintain or enhance these relationships, our development could be hindered.

 

We believe that our strategic relationships with leading Internet portal companies, other online retailers, radio advertisers and direct marketers are critical to attract customers, facilitate broad market acceptance of our products and brands and enhance our sales and marketing capabilities. For example, 29.1% of our total customer orders placed in fiscal 2003 were generated from customers who linked to our website from websites operated by other retailers or Internet portal companies with whom we have a strategic relationship. A failure to maintain existing and to establish additional strategic online relationships that generate a significant amount of traffic from other websites could limit the growth of our business. Establishing and maintaining relationships with leading Internet portal companies, other online retailers, radio advertisers and direct marketers is competitive and expensive. We may not successfully enter into additional relationships or renew existing ones beyond their current terms. We may also be required to pay significant fees to maintain and expand existing relationships. Further, many Internet portal companies, other online retailers, radio advertisers and direct marketers that we may approach to establish an advertising presence or with whom we already have an existing relationship may also provide advertising services for our competitors. As a result, these companies may be reluctant to enter into, maintain or expand a relationship with us. Our revenues may suffer if we fail to enter into new relationships or maintain or expand existing relationships, or if these relationships do not result in traffic sufficient to justify their costs.

 

In addition, we are subject to many risks beyond our control that influence the success or failure of our strategic partners. For example, traffic to our branded websites could decrease if the traffic to the website of an Internet portal company on which we advertise decreases. Our business could be harmed if any of our strategic partners experience financial or operational difficulties or if they experience other corporate developments that adversely affect their performance under our agreements.

 

We are dependent on other retailers using our marketplace to sell perishable products to their customers. Any failure by us to recruit additional retailers to use our marketplace, or any loss of our current users, could harm our business.

 

We intend to grow a portion of our business and product categories through relationships with other branded retailers and direct marketers that use our platform to sell under their brands. We currently have arrangements with Martha Stewart Living Omnimedia, Albertson’s, Inc., another Fortune 100 retailer and other retailers. Under our agreement with Martha Stewart Living Omnimedia, we use our platform to operate the floral website of Martha Stewart Living Omnimedia. Our agreement with Martha Stewart Living Omnimedia may be terminated by either party upon 120 days prior notice. Under our agreement with Albertson’s, we provide our

 

14


Table of Contents

market platform and products for Albertson’s online floral business. Our agreement with Albertson’s is for a three- year term, automatically renewable for additional one-year periods, unless prior notice is given. Our agreement with Albertson’s may be terminated by either party for specified reasons, including bankruptcy or cessation of business by the other party. It may also be terminated by the non-breaching party 60 days after notification of an uncured breach of the agreement. While we are not dependent on these agreements and while these agreements represent an immaterial percentage of our net sales in fiscal 2003 and for the nine months ended March 31, 2004, any termination of these agreements, or failure to enter into similar agreements, could adversely affect this aspect of our business model.

 

If the supply of flowers or any other perishable product we offer for sale becomes limited, the price of these products could rise or these products may be unavailable and our revenues and gross margins could decline.

 

Many factors, such as weather conditions, agricultural limitations and restrictions relating to the management of pests and disease, affect the supply of flowers and the price of our floral products. If the supply of flowers available for sale is limited, prices for flowers could rise, which could cause customer demand for our floral products to be reduced and our revenues and gross margins to decline. Alternatively, we may not be able to obtain high-quality flowers in an amount sufficient to meet customer demand. Even if available, flowers from alternate sources may be of lesser quality and/or may be more expensive than those currently offered by us. We expect that we will encounter similar risks with premium meat, fresh fruit and other perishable products as we expand our e-commerce platform into these product categories.

 

In fiscal 2003, 54.0% of the flowers we sold were grown by farmers located abroad, primarily in Colombia, Ecuador and Holland, and we expect that this will continue in the future. We also may purchase premium meat, fresh fruit and other perishable products from suppliers in foreign countries. The availability and price of these products could be affected by a number of other factors affecting foreign suppliers, including:

 

    import duties and quotas;

 

    time-consuming import regulations or controls at airports;

 

    changes in trading status;

 

    economic uncertainties and currency fluctuations;

 

    foreign government regulations with respect to diseases such as mad cow;

 

    political unrest;

 

    governmental bans or quarantines; or

 

    trade restrictions, including U.S. retaliation against foreign trade practices.

 

If the number of customers using our satisfaction guarantee increases, our net income could decrease.

 

We guarantee that all of our flowers will last at least seven days and our plants at least 14 days. We offer our customers a 100% satisfaction guarantee on our floral, meat and fruit products during the relevant periods. We expect to offer a similar 100% satisfaction guarantee on our other products. If customers are not satisfied with the products they receive, we either send them a replacement product or issue a refund. If a significant number of customers request replacement products or refunds, our net income could decrease and our reputation as a provider of high-quality products could be harmed.

 

System interruptions, natural disasters and other unexpected problems could prevent us from fulfilling orders for our customers.

 

Our computer and telecommunications systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, failure in the Internet backbone service providers or

 

15


Table of Contents

Internet service providers, earthquakes, acts of war or terrorism, acts of God, human error, computer viruses, physical or electronic break-ins and similar events. Any of these events could lead to system interruptions, delays and loss of critical data, and make our websites or toll-free customer service centers inaccessible to our customers or prevent us from efficiently fulfilling orders or providing services to other retailers who rely on our market platform to assist them in operating their online businesses. For instance, in January 2004, a router failure at our Internet service provider caused two hours of degraded website response times and availability. This effect would be magnified if interruptions were to occur during one of our peak selling periods, such as Valentine’s Day or Mother’s Day. We do not have fully redundant systems in different geographical areas or a formally tested disaster recovery plan. Our business interruption insurance may be inadequate to compensate for all losses that may occur.

 

Despite any precautions we may take, the occurrence of a natural disaster, the closure of a hosting facility we are using without adequate notice for financial reasons or other unanticipated problems could result in lengthy interruptions in our services. In addition, the failure by our hosting facilities to provide our required data communications capacity could result in interruptions in our service. Any slowdown, damage to or failure of our systems could result in interruptions in our service. We cannot assure you that we will adequately, and in a timely manner, implement systems to improve the speed, security and availability of our Internet and telecommunications systems. Frequent or long service delays or interruptions in our service or disruptions during a peak holiday season will reduce our revenues and profits, and our reputation and future revenues and profits will be harmed if our customers believe that our system is unreliable.

 

We may not be able to increase capacity or introduce enhancements to our branded websites in a timely manner or without service interruptions.

 

A key element of our strategy is to generate a high volume of traffic on our branded websites. As traffic on our branded websites grows, we may not be able to accommodate all of the growth in user demand on our branded websites and in our toll-free customer service center. Our inability to add additional hardware and software to upgrade our existing technology or network infrastructure to accommodate in a timely manner increased traffic on our branded websites, in our toll-free customer service centers and increased sales volume, may cause decreased levels of customer service and satisfaction. Failure to implement new systems effectively or within a reasonable period of time could adversely affect our business, results of operations and financial condition.

 

We also intend to introduce additional or enhanced features and services to retain current customers and attract new customers to our branded websites. If we introduce a feature or a service that is not favorably received, our current customers may not use our branded websites as frequently, and we may not be successful in attracting new customers. We may also experience difficulties that could delay or prevent us from introducing new services and features. Furthermore, these new services or features may contain errors that are discovered only after they are introduced. We may need to significantly modify the design of these services or features to correct errors. If customers encounter difficulty with or do not accept new services or features, our business, results of operations and financial condition could be adversely affected.

 

We fulfill a significant portion of our flower orders through our Miami distribution facility.

 

We fulfilled 20.8% of our flower orders in the nine months ended March 31, 2004 and 22.8% of our flower orders in fiscal year 2003 through our Miami distribution facility. In the future, we may be unable to fulfill our customers’ orders through the Miami distribution facility in a timely manner, or at all, due to a number of factors, including:

 

    a failure to maintain or renew our existing lease agreement for our Miami distribution facility;

 

    a prolonged power or equipment failure;

 

16


Table of Contents
    an employee strike or other labor stoppage;

 

    a disruption in the transportation infrastructure including bridges and roads;

 

    a refrigeration failure; or

 

    a fire, flood, hurricane or other disaster.

 

In the event that we are unable to fulfill our customers’ orders through the Miami distribution facility, we will attempt to re-ship the orders from another source to ensure timely delivery. However, we cannot guarantee that our other suppliers and distribution facilities will have the capacity or the variety of flowers to fulfill all orders from the Miami distribution facility or that we will be able to deliver the affected orders in a timely manner. In addition, if operations from our Miami distribution facility become permanently disrupted due to any of the above or other factors, we may not be able to secure a replacement distribution facility in a location on terms acceptable to us or at all. Our business and results of operations could be materially and adversely affected if we experience temporary or permanent disruptions at our Miami distribution facility.

 

If we fail to protect our intellectual property rights, our ability to compete could be harmed.

 

Protection of our intellectual property is critical to our success. Patent, trademark, copyright and trade secret laws and confidentiality and other contractual provisions afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We face numerous risks in protecting our intellectual property rights, including the following:

 

    our pending patent applications, copyrights, trademarks, trade secrets and other intellectual property rights may be challenged or invalidated by our competitors;

 

    we only have three U.S. patent applications pending in the United States Patent and Trademark Office and none of the patent applications have yet to issue;

 

    our pending patent applications may not issue, or, if issued, may not provide meaningful protection for related products or proprietary rights;

 

    in the event one or more of our pending patent applications issue into a patent, there may be prior art in existence that the United States Patent and Trademark Office has not considered which may invalidate one or more patent claims;

 

    we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees, consultants or advisors;

 

    the laws of foreign countries, including Australia, Brazil, Canada, the European Union, Japan, Mexico, New Zealand and Switzerland where we have issued or pending trademarks, may not protect our intellectual property rights to the same extent as the laws of the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate in foreign countries;

 

    our competitors may lawfully develop proprietary software or other technology that competes with our proprietary supply chain technology; and

 

    we may be unable to successfully identify or prosecute unauthorized uses of our proprietary technology.

 

As a result, our means of protecting our intellectual property rights and brands may not be adequate. Furthermore, despite our efforts, third parties may have violated and may in the future violate, or attempt to violate, our intellectual property rights. Infringement claims and lawsuits would likely be expensive to resolve and would require substantial management time and resources. In addition, we have not sought, and do not intend to seek, trademark, patent and other intellectual property protections in most foreign countries. In countries where we do not have such protection, businesses may use our trademarks to sell products or to develop a distribution method that incorporates our patented technology.

 

17


Table of Contents

We may be sued by third parties for alleged infringement of their proprietary rights.

 

Companies that participate in the e-commerce and supply chain management industries or others may hold a large number of patents, patent applications, trademarks and copyrights. Participants in these industries are involved in litigation based on allegations of patent infringement or other violations of intellectual property rights. Intellectual property disputes frequently involve highly complex and costly technical or scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and uncertainty. Accordingly, intellectual property contests, with or without merit, could be costly and time-consuming to litigate or settle, and could divert management’s attention from executing our business plan. In addition, our distribution technology may not be able to withstand any third-party claims against its use. If we were unable to obtain any necessary license following a determination of infringement or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our distribution technology to avoid infringing a third-party’s patent and could be required to temporarily or permanently discontinue using the related aspect of our technology.

 

Current and future governmental and industry regulations may significantly limit our business opportunities.

 

New laws or regulations may be enacted with respect to the Internet or existing laws may be applied or interpreted to apply to the Internet, which may decrease the growth in the use of the Internet or our branded websites. As use of the Internet continues to evolve, we expect that there will be an increasing number of laws and regulations pertaining to the Internet in the U.S. and throughout the world. These laws and regulations may relate to liability for information received from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services sold over the Internet. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing. Further, the growth and development of online commerce may prompt calls for more stringent consumer protection laws, both in the U.S. and abroad. We also may be subject to regulation not specifically related to the Internet, including laws affecting direct marketers and advertisers. The adoption of or modification of laws applicable to the Internet could affect our ability to market our products, decrease the demand for our products, increase our costs or otherwise adversely affect our business.

 

We are affected by regulations applicable to the importation of flowers and the sale and handling of food items.

 

Our importation of certain flower offerings and our sale and handling of premium meat and fresh fruit offerings subject us to various federal, state and local government regulations, including regulations imposed by the United States Food & Drug Administration, or FDA, the United States Department of Labor, Occupational Safety and Health Administration, or OSHA, the United States Department of Agriculture, or USDA, and Animal and Plant Health Inspection Service, or APHIS. We have designed our importation procedures and our food handling operations to comply with such regulations. However, the FDA, OSHA, USDA, APHIS or another federal, state or local food regulatory authority may require changes to our importation procedures and food sales and handling operations. We may not be able to make the requested governmental changes or obtain any required permits, licenses or approvals in a timely manner, or at all. Failure to make requested changes or to obtain or maintain a required permit, license or approval could cause us to incur substantial compliance costs and delay the availability of, or cancel, certain product offerings. In addition, any inquiry or investigation from a regulatory authority could have a negative impact on our reputation. Any of these events would harm our business and adversely affect our results of operations.

 

18


Table of Contents

Various legal rules and regulations related to the collection, dissemination and security of personal information may affect our ability to solicit our customers and potential customers with emails or telephone calls and to collect or disseminate personal data about our customers.

 

A growing body of laws designed to protect the privacy of personally identifiable information as well as to protect against its misuse may adversely affect the growth of our business and our marketing efforts. These laws include the Federal Trade Commission Act, the Children’s Online Privacy Protection Act and Federal Trade Commission, or FTC, regulations implementing that act, the Fair Credit Reporting Act, the Gramm Leach Bliley Act and related regulations as well as other legal provisions. The FTC has the authority to protect against the misuse of consumer information by targeting companies that collect, disseminate or maintain personal information in an unfair or deceptive manner, as well as companies that fail to notify parents and obtain parental consent before collecting information from children. The FTC has conducted dozens of investigations into the privacy and security practices of companies that collect information on the Internet. The evolving nature of the FTC’s and other governmental bodies’ enforcement efforts, and the possibility of new laws in this area, may adversely affect our ability to collect and disseminate or share demographic and personal information from users and our ability to email or telephone users, all of which could adversely affect our marketing efforts and business.

 

Our branded websites use various “cookies” without the customer’s knowledge or consent. These cookies may or may not be saved on customer’s hard drives. We use cookies for a variety of reasons, including the collection of data derived from the customer’s Internet activity. Most currently available web browsers allow users to remove cookies at any time or to prevent cookies from being stored on their hard drive. Some commentators, privacy advocates and governmental bodies have suggested limiting or eliminating the use of cookies or other data collecting tools. Any reduction or limitation in the use of cookies or other data collecting tools could limit the effectiveness of our sales and marketing efforts. We could incur expenses if new regulations concerning the use of personal information are introduced or if our privacy practices are investigated.

 

We depend on continued use of the Internet and growth of the online perishables retail market.

 

Our revenues may not grow if the Internet does not continue to grow as an accepted medium for commerce in flowers and other perishable product categories. Consumer use of the Internet as a medium for commerce, and especially commerce in perishable products, is a recent phenomenon that is subject to a level of uncertainty. A number of factors may inhibit Internet usage, including:

 

    inadequate network infrastructure;

 

    consumer concerns for Internet privacy and security;

 

    inconsistent quality of service;

 

    lack of availability of cost-effective, high-speed service; and

 

    consumer concerns over purchasing perishable goods over the Internet.

 

If use of the Internet as a medium for commerce in perishable products does not continue to grow, or grows at a slower rate than we anticipate, our sales will be lower than expected and our business will be harmed.

 

Our accounting and financial system is not integrated with our transaction processing system.

 

We use an internally developed system for substantially all aspects of transaction processing, including order management, credit card processing and shipping. Our accounting and financial system is purchased from a third-party. Because our current transaction processing system, which provides frequent operational reports, is not integrated with our accounting and financial system, we must manually input data in order to prepare information for accounting and financial reporting. This manual input of data may make it more difficult for management to obtain accurate financial statements and reporting information on a timely basis. We intend to

 

19


Table of Contents

integrate our transaction processing and accounting systems. We cannot guarantee that we will complete this integration in a fast and effective manner. Any inability to do so may have a material adverse effect on our business, financial condition and results of operations.

 

Online security breaches could harm our business.

 

The secure transmission of confidential information over the Internet is essential in maintaining consumer confidence in our branded websites. Even occasional security breaches of our system or other Internet-based systems could significantly harm our business and damage our reputation. Any penetration of our network security or other misappropriation of our customer’s personal information could subject us to potential liability. We may be subject to claims based on unauthorized purchases with credit card information, or aiding and abetting identity theft or other similar fraud claims. Claims could also be based on other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in litigation and financial liability. We rely on licensed encryption and authentication technology to effect the secure transmission of confidential information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology that we use to protect customer transaction data.

 

We may incur substantial expense to protect against and remedy security breaches and their consequences. A party that is able to circumvent our security systems could steal proprietary information or cause interruptions in our operations. Our insurance policies’ limits may not be adequate to reimburse us for losses caused by security breaches. We cannot guarantee that our security measures will prevent security breaches.

 

Consumer spending on flowers and other perishable products we sell or intend to sell may vary with general economic conditions in the U.S.

 

Negative trends in the general economy, including trends resulting from actual or threatened military action by the U.S. and threats of terrorist attacks on the U.S. and abroad, could cause a decrease in consumer spending on flowers, premium meats, fresh fruits and perishable products in general. Also, any reduction in consumer confidence or disposable income in general may affect the demand for our products. If general economic conditions do not improve or deteriorate further and our customers have less disposable income, consumers may spend less on our products and our quarterly operating results may suffer.

 

We have not yet implemented all of the governance and accounting practices and policies required of a publicly traded company.

 

In connection with her resignation from our board of directors in November 2003, one of our former directors raised her concern that our company was not addressing the following matters in a manner consistent with what is expected of a publicly traded company:

 

    full compliance with the spirit, as well as the technical requirements of Sarbanes-Oxley;

 

    the methodology for determining executive compensation;

 

    the limited information presented to the audit committee at its meeting regarding September 2003 financials;

 

    the need to expand the role and oversight of the audit committee;

 

    the importance of succession planning; and

 

    the commitment of senior executives to the company following exercise of their options.

 

We have investigated these matters and have concluded that our processes for addressing them have been adequate. We have implemented practices and procedures designed to comply with the requirements applicable

 

20


Table of Contents

to public companies, including the requirements of the Nasdaq National Market and the Sarbanes-Oxley Act. However, there can be no assurance that these practices and procedures will be adequate. Our failure to follow these practices and procedures could adversely affect our ability to comply with standards expected of a public company.

 

We may not successfully address problems encountered in connection with any future acquisitions.

 

In December 1999, we purchased Flower Farm Direct, Inc. Subsequently, we amortized and wrote off approximately $9.0 million of goodwill related to the acquisition. We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our technical capabilities, complement our current products and services or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve numerous risks, including:

 

    problems assimilating the purchased technologies, products or business operations;

 

    problems maintaining uniform standards, procedures, controls and policies;

 

    unanticipated costs associated with the acquisition, including accounting charges and transaction expenses;

 

    diversion of management’s attention from our core business;

 

    adverse effects on existing business relationships with suppliers and customers;

 

    risks associated with entering markets in which we have no or limited prior experience; and

 

    potential loss of key employees of acquired organizations.

 

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted, and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders would be diluted.

 

We may have difficulty managing any growth that we might experience.

 

We expect to continue to experience growth in the scope of our operations and the number of our employees. If this growth continues, it will place a significant strain on our management team and on our operational and financial systems, procedures and controls. Our future success will depend in part on the ability of our management team to manage any growth effectively. This will require our management to:

 

    maintain our cost structure at an appropriate level based on the revenues we generate;

 

    manage multiple, concurrent development projects;

 

    hire and train additional personnel;

 

    implement and improve our operational and financial systems, procedures and controls; and

 

    manage operations in multiple time zones.

 

Any failure to successfully manage our growth could distract management’s attention, and result in our failure to execute our business plan.

 

21


Table of Contents

If we are required to collect sales and use taxes on the products we sell in additional jurisdictions, we may be subject to liability for past sales and our future sales may decrease.

 

In accordance with current industry practice and our interpretation of current law, we do not currently collect sales and use taxes or other such taxes with respect to shipments of goods into states other than California, Florida, Indiana, Kansas, Mississippi, New Jersey, Ohio, Pennsylvania, Texas and Washington. The operation of our distribution facilities, the operations of any future distribution facilities and other aspects of our evolving business may, however, result in increased sales and use tax obligations. Some states have sought or are now seeking to impose sales or other tax collection obligations on companies that engage in electronic commerce as we do. Federal legislation limits the imposition of U.S. state and local taxes on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act, which placed a moratorium on state and local taxes on Internet access, unless such tax was already imposed prior to October 1, 1998, and on discriminatory taxes on electronic commerce. This moratorium expired in November 2003. Congress is currently debating several proposals to retain the moratorium. If no moratorium proposals are adopted, state and local governments may be free to impose new taxes on electronically purchased goods. Congress could also pass alternative proposals allowing state and local governments to impose taxes on electronic commerce. In either event, we could be required to pay past and collect future sales and use taxes in states other than those in which we already collect such taxes.

 

We are dependent on our management team and key employees, and the loss of any of them could harm our business.

 

Our success depends, in part, upon the continued availability and contributions of our senior management team, particularly William Strauss, our chief executive officer, and Abraham Wynperle, our president and chief operating officer. Important factors that could cause the loss of key personnel include:

 

    members of our management team may terminate their employment with us at any time;

 

    we do not maintain key-man life insurance on any of our employees;

 

    significant portions of the stock options held by the members of our management team are vested; and

 

    many of the stock options held by our executive officers provide for accelerated vesting in the event of a sale or change of control of our company.

 

The loss of key personnel or an inability to attract qualified personnel in a timely manner could slow our technology and product development and harm our ability to execute our business plan.

 

If third parties acquire rights to use similar domain names or phone numbers or if we lose the right to use our domain names or phone numbers, our brands may be damaged and we may lose sales.

 

Our Internet domain names are an important aspect of our brand recognition. We cannot practically acquire rights to all domain names similar to www.providecommerce.com, www.proflowers.com, www.uptownprime.com or www.cherrymoonfarms.com. If third parties obtain rights to similar domain names, these third parties may confuse our customers and cause our customers to inadvertently place orders with these third parties, which would result in lost sales for us and could damage our brand.

 

The phone number that spells 1-888-FRESHEST is also important to our brand and business. While we have obtained the right to use the phone numbers 1-888-FRESHEST, 1-800-FRESHEST and 1-800-PROFLOW, as well as common toll-free “FRESHEST” and “PROFLOW” misdials, we may not be able to obtain rights to use the FRESHEST and PROFLOW phone numbers as new toll-free prefixes are issued, or the rights to all similar and potentially confusing numbers. If third parties obtain the phone number which spells “FRESHEST” or “PROFLOW” with a different prefix, these parties may also confuse our customers and impede our customer service efforts, causing lost sales and potential damage to our brands. In addition, under applicable Federal Communication Commission, or FCC, rules, ownership rights to phone numbers cannot be acquired. Accordingly, the FCC may rescind our right to use any of its phone numbers, including 1-888-FRESHEST and 1-800-PROFLOW.

 

22


Table of Contents

If our third-party technology providers do not adequately maintain our telephone service, we may experience system failures and our business may suffer.

 

We are largely dependent on AT&T and SBC Pacific Bell to provide telephone service to our customer service centers. If AT&T or SBC Pacific Bell experience system failures or fail to adequately maintain our systems, we would experience interruptions and our customers might not continue to utilize our services. Frequent or long system failures or interruptions in our service or disruptions during a peak holiday season could materially harm our business and results of operations.

 

If we lose our telephone service, we will be unable to operate a significant portion of our customer service. Our future success depends upon these third-party relationships because we do not have the resources to maintain telephone services without these or other third parties. Failure to maintain these relationships or replace them on financially attractive terms may disrupt our operations or require us to incur significant unanticipated costs.

 

Our business would be injured by extensive credit card fraud.

 

Our general and administrative expense would increase if we experience significant credit card fraud or fraud with respect to our bill-me-later functionality, a third party payment option similar to traditional credit cards. A failure to adequately control fraudulent credit card transactions or bill-me-later transactions would increase our general and administrative expense because we do not carry insurance against this risk. We have developed technology to help detect the fraudulent use of credit card information. Nonetheless, to date, we have suffered losses as a result of orders placed with fraudulent credit card data even though the associated financial institution or bill-me-later service provider approved payment of the orders. Under current credit card practices, we are liable for fraudulent credit card transactions if we do not obtain a cardholder’s signature.

 

Product liability claims may subject us to increased costs.

 

Several of the products we sell and intend to sell, including perishable food products, may expose us to product liability claims in the event that the use or consumption of these products results in personal injury. We may incur significant costs in defense of product liability claims. Product liability claims often create negative publicity, which could materially damage our reputation and our brands. Although we maintain insurance against product liability claims, our coverage may be inadequate to cover any liabilities we may incur.

 

Health concerns relating to the consumption of beef, fruit or other food products could have a negative impact on our premium meat, fruit and related product offerings and could negatively impact our results of operations.

 

The success of our premium meat website and other planned perishable product offerings could be affected by health concerns related to the consumption of beef or fruit or negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning e-coli, “mad cow” or “foot-and-mouth” disease. This negative publicity may adversely affect demand for our premium meat or fruit products which could materially harm our business and results of operations.

 

Risks Related to This Offering

 

There was no public market for our common stock prior to our initial public offering.

 

We completed our initial public offering in December 2003. An active trading market may not develop or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using our shares as consideration.

 

23


Table of Contents

We expect that the price of our common stock will fluctuate substantially.

 

The public offering price for the shares of our common stock sold in this offering has been determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. The price of our common stock may decline. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:

 

    actual or anticipated fluctuations in our results of operations;

 

    changes in securities analysts’ expectations or our failures to meet those expectations;

 

    announcements of significant contracts by us or our competitors;

 

    changes in our pricing policies or the pricing policies of our competitors;

 

    inability to maintain our current relationship with our delivery carrier, FedEx;

 

    developments with respect to intellectual property rights;

 

    the introduction of new products or product enhancements by us or our competitors;

 

    the commencement of or our involvement in litigation;

 

    our sale of common stock or other securities in the future;

 

    conditions and trends in the e-commerce industry;

 

    changes in market valuation or earnings of our competitors;

 

    the trading volume of our common stock;

 

    changes in the estimation of the future size and growth rate of our markets; and

 

    general economic conditions.

 

In addition, the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of e-commerce companies have been particularly volatile, including our stock price since our initial public offering in December 2003. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources.

 

Because of the significant stock ownership of our majority stockholder, our majority stockholder will be able to exert significant influence over us and our significant corporate decisions.

 

Upon completion of this offering, assuming exercise of the underwriters’ over-allotment option in full, our majority stockholder and persons affiliated with our majority stockholder will continue to beneficially own 36.7% of our outstanding common stock. In addition, upon completion of this offering, assuming exercise of the underwriters’ over-allotment option in full, our executive officers, directors and other stockholders holding more than 5% of our outstanding capital stock and their affiliates will, in the aggregate, beneficially own approximately 45.1% of our outstanding common stock. These persons, acting together, may have the ability to control our management and affairs. Our majority stockholder and persons affiliated with our majority stockholder will have the ability to exert significant influence over the outcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership may harm the market price of our common stock by, among other things:

 

    delaying, deferring or preventing a change in control of our company;

 

    impeding a merger, consolidation, takeover or other business combination involving our company;

 

24


Table of Contents
    causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or

 

    discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

 

Future sales of our common stock may depress our stock price.

 

After this offering, we will have 11,656,115 shares of common stock outstanding. The 1,981,019 shares sold in this offering, or 2,278,172 shares if the underwriters’ over-allotment is exercised in full, will be freely tradeable without restriction or further registration under federal securities laws unless purchased by our affiliates. Of the remaining 9,675,096 shares of common stock outstanding after this offering, based upon shares outstanding as of March 31, 2004, 4,650,712 are freely tradeable without restriction or further registration under federal securities laws unless purchased by our affiliates and 5,024,384 will be available for sale in the public market as follows:

 

Number of Shares

    

Date of Availability for Sale


983,336      Upon the effective date of this Registration Statement
4,041,048      90 days following the effective date of this Registration Statement

 

The above table assumes the effectiveness of the lock-up agreements under which holders of 44.96% of our common stock or other securities have agreed not to sell or otherwise dispose of their shares of common stock or other securities. SG Cowen & Co., LLC and Deutsche Bank Securities Inc. may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. These lock-up agreements do not restrict transfers in connection with gifts or certain estate planning transfers, so long as in each case, the transferee agrees to be bound by the lock-up restriction for the remaining period. These lock-up agreements also permit certain of our directors and executive officers, including our Chairman and our Chief Executive Officer, to sell an aggregate of 50,000 shares of common stock during the 90-day period pursuant to any plan adopted and implemented in compliance with Rule 10b5-1 under the Exchange Act. The lock-up agreement with Arthur B. Laffer, one of our directors, also permits him to sell during the 90-day period up to 4,811 shares of common stock issued upon the exercise of certain warrants held by Dr. Laffer.

 

If our common stockholders sell substantial amounts of common stock in the public market, or if the market perceives that these sales may occur, the market price of our common stock may decline. Certain of our directors and executive officers, including our Chairman and our Chief Executive Officer, have established programmed selling plans under Rule 10b5-1 for the purpose of effecting sales of common stock following this offering. In addition, after this offering, assuming exercise in full of the underwriters’ over-allotment option, the holders of approximately 6,230,371 shares of common stock, assuming exercise of such holders’ outstanding options and warrants, will have rights, subject to some conditions, to require us to file registration statements covering the resale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. These registration rights of our stockholders could impair our ability to raise capital by depressing the price at which we could sell our common stock.

 

As a new investor, you will experience immediate and substantial dilution in the net tangible book value of your shares.

 

The public offering price of our common stock in this offering is considerably more than the net tangible book value per share of our outstanding common stock. Accordingly, investors purchasing shares of common stock in this offering will:

 

    pay a price per share that substantially exceeds the value of our assets after subtracting liabilities and to the extent outstanding stock options or warrants are exercised, there will be further dilution to new investors.

 

    contribute 2.3% of the total amount invested to date to fund our company based on an assumed offering price to the public of $20.16 per share, the last reported sale price on June 28, 2004, but will own only 2.0% of the shares of common stock outstanding after the offering.

 

25


Table of Contents

Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.

 

Our capital requirements will depend on many factors, including:

 

    changes in our operating plan;

 

    lower than anticipated revenues;

 

    increased expenses in new technology and research and development projects;

 

    the number and timing of acquisitions and other strategic transactions; and

 

    the costs associated with our expansion, if any.

 

The proceeds from this offering, together with our existing sources of cash and cash flows, may not be sufficient to fund our activities. As a result, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products and execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations and financial condition.

 

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price of our stock.

 

Our amended and restated certificate of incorporation and restated bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions:

 

    authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of our common stock;

 

    prohibit stockholders from removing directors without cause, calling special stockholder meetings or taking action by written consent;

 

    limit stockholders from filling board vacancies; and

 

    require advance written notice of stockholder proposals and director nominations.

 

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including to delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

 

26


Table of Contents

FORWARD-LOOKING STATEMENTS

 

This prospectus may contain forward-looking statements that involve substantial risks and uncertainties regarding future events or our future performance. When used in this prospectus, the words “anticipate,” “believe,” “estimate,” “may,” “intent,” “continue,” “will,” “plan,” “intend,” “expect” and similar expressions identify forward-looking statements. You can also identify these forward-looking statements by discussions of strategies, plans or intentions. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other forward-looking information. We believe that it is important to communicate our future expectations to our investors. Although we believe that our expectations reflected in any forward-looking statements are reasonable, these expectations may not be achieved. The factors listed in the section captioned “Risk Factors,” as well as any cautionary language included in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this prospectus could have a material adverse effect on our business, performance, operating results and financial condition. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

27


Table of Contents

USE OF PROCEEDS

 

We estimate that the net proceeds from the sale of the 100,000 shares of common stock that we are selling in this offering and from the exercise of options and warrants exercisable for 136,500 shares of common stock will be approximately $1.6 million, based on $20.16 per share, the last reported sale price on June 28, 2004, and after deducting estimated underwriting discounts and commissions and our estimated offering expenses. We will not receive any proceeds from the sale of common stock and warrants by the selling stockholders who propose to sell up to an aggregate of 1,881,019 shares of common stock to the underwriters.

 

We intend to use the net proceeds from this offering for general corporate purposes, including paying expenses in connection with this offering. The amounts actually expended for these purposes and the timing of our actual expenditures will depend on numerous factors, including the status of our efforts to increase our number of relationships with other retailers to use our market platform, sales and marketing activities, technological advances, amount of cash generated or used by our operations and competition. We have not determined the amount or timing of these expenditures and will retain broad discretion in the allocation and use of the net proceeds. Pending the uses described above, we intend to invest the net proceeds in short-term, interest- bearing, investment-grade securities. We believe that our available cash, together with the net proceeds of this offering, will be sufficient to meet our capital requirements for at least the next 12 months.

 

PRICE RANGE OF OUR COMMON STOCK AND DIVIDEND POLICY

 

Since December 17, 2003, our common stock has been listed on the Nasdaq National Market under the symbol “PRVD.” The following table sets forth, for the periods indicated, the high and low closing sale prices of our common stock as reported by Nasdaq, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

 

       Price Range of
Common Stock


Fiscal Year Ending June 30, 2004


     High

     Low

Second Quarter (from December 17 through December 31, 2003)

     $ 15.17      $13.00

Third Quarter

     $ 25.17      $14.80

Fourth Quarter (through June 28)

     $ 24.34      $17.95

 

On June 28, 2004, the closing price per share of our common stock was $20.16, as reported by Nasdaq. At June 4, 2004, there were approximately 114 holders of record of our common stock. This figure does not reflect persons or entities who hold their stock in nominee or “street” name through various brokerage firms.

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds to support our operations and to finance the growth and development of our business. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects and other factors as our board of directors may deem relevant. In August 2003, we paid a special cash dividend on our then issued and outstanding preferred stock in the aggregate total amount of $1.5 million.

 

28


Table of Contents

CAPITALIZATION

 

The following table summarizes our capitalization as of March 31, 2004:

 

    on an actual basis; and

 

    on an as adjusted basis to give effect, after deducting estimated underwriting discounts and commissions and our estimated offering expenses, to:

 

    the sale of 100,000 shares of common stock offered by us at an assumed public offering price of $20.16 per share, the last reported sale price on June 28, 2004; and

 

    the exercise of options and warrants exercisable for 136,500 shares of common stock at a weighted average exercise price of $1.27 per share in connection with this offering.

 

You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

       As of March 31, 2004

 
       Actual

     As Adjusted

 
       (in thousands, except share
and per share data)
 
       (Unaudited)  

Cash and cash equivalents

     $ 51,784      $ 53,184  
      


  


Stockholders’ equity:

                   

Preferred stock, par value $0.001 per share; 5,000,000 authorized actual and as adjusted; no shares issued and outstanding, actual and as adjusted

       —          —    

Common stock, $0.001 par value; 50,000,000 shares authorized actual and as adjusted; 11,419,615 shares issued and outstanding, actual, 11,656,115 shares issued and outstanding as adjusted

       11        12  

Additional paid-in capital

       94,270        95,842  

Deferred compensation

       (2,175 )      (2,175 )

Accumulated deficit

       (35,130 )      (35,130 )
      


  


Total stockholders’ equity

       56,976        58,549  
      


  


Total capitalization

     $ 56,976      $ 58,549  
      


  


 

The number of shares of common stock to be outstanding after this offering is based on 11,419,615 shares of common stock issued and outstanding as of March 31, 2004. This number assumes no exercise of stock options or warrants after March 31, 2004, other than the exercise of options and warrants exercisable for 136,500 shares of common stock at a weighted average exercise price of $1.27 per share in connection with this offering (163,026 shares if the over-allotment option is exercised in full) and excludes:

 

    964,465 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $4.27 per share;

 

    2,207,209 shares issuable upon exercise of outstanding options at a weighted average exercise price of $3.45 per share; and

 

    2,036,619 shares available for future issuance as of March 31, 2004 under our existing equity incentive plans, from which options to purchase up to 92,350 shares of common stock at a weighted average exercise price of $21.92 per share have been granted for the period from April 1, 2004 to June 28, 2004.

 

29


Table of Contents

DILUTION

 

Our net tangible book value as of March 31, 2004 was approximately $57.0 million, or approximately $4.99 per share of our common stock. Net tangible book value per share represents the amount of our total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding as of March 31, 2004.

 

Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after completion of this offering.

 

After giving effect to our sale of the 100,000 shares offered by us in this offering at an assumed public offering price of $20.16 per share, the last reported sale price on June 28, 2004, and after deducting estimated underwriting discounts and commissions and our estimated offering expenses, our adjusted net tangible book value as of March 31, 2004 would have been approximately $58.5 million, or approximately $5.02 per share of common stock. This represents an immediate increase in net tangible book value of $0.03 per share to existing stockholders and an immediate dilution in net tangible book value of $15.14 per share to new investors. The following table illustrates this per share dilution:

 

Assumed public offering price per share

          $ 20.16

Net tangible book value per share as of March 31, 2004

   $ 4.99       

Increase per share attributable to new investors

     0.03       
    

      

Net tangible book value per share after the offering

            5.02
           

Dilution per share to new investors

          $ 15.14
           

 

The following table summarizes, as of March 31, 2004, the differences between our existing stockholders and investors in this offering with respect to the total number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by our existing stockholders and the price per share paid by investors in this offering based on an assumed public offering price of $20.16 per share, the last reported sale price on June 28, 2004, before deducting estimated underwriting discounts and commissions and our estimated offering expenses:

 

     Shares Purchased

    Total Consideration

   

Average Price

Per Share


     Number

   Percent

    Amount

   Percent

   

Existing stockholders

   11,419,615    98.0 %   $ 93,076,874    97.7 %   $ 8.15

New investors

   236,500    2.0       2,188,795    2.3     $ 9.25
    
  

 

  

     

Total

   11,656,115    100.0 %   $ 95,265,669    100.0 %      
    
  

 

  

     

 

The tables and calculations above assume no exercise of the following outstanding options or warrants outstanding at March 31, 2004 other than the exercise of options and warrants exercisable for 136,500 shares of common stock at a weighted average exercise price of $1.27 per share in connection with this offering (163,026 shares if the over-allotment option is exercised in full):

 

    964,465 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $4.27 per share;

 

    2,207,209 shares issuable upon exercise of outstanding options at a weighted average exercise price of $3.45 per share; and

 

    2,036,619 shares available for future issuance as of March 31, 2004 under our existing equity incentive plans, from which options to purchase up to 92,350 shares of common stock at a weighted average exercise price of $21.92 per share have been granted for the period from April 1, 2004 to June 28, 2004.

 

30


Table of Contents

Because the exercise price of the outstanding options and some of the warrants is significantly below the assumed offering price, investors purchasing common stock in this offering will suffer additional dilution when and if these options or warrants are exercised. Please see “Management—Employee Benefit Plans” for further information regarding our equity incentive and employee stock purchase plans. For information on warrants, please see “Description of Capital Stock.”

 

31


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

 

You should read the selected consolidated financial and operating data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

The selected consolidated statement of operations data for the fiscal years ended June 30, 2001 (fiscal 2001), 2002 (fiscal 2002) and 2003 (fiscal 2003), and the selected balance sheet data as of June 30, 2002 and 2003 are derived from the audited consolidated financial statements which are included elsewhere in this prospectus. The selected consolidated statements of operations data for the nine months ended March 31, 2003 and 2004 and the consolidated balance sheet data as of March 31, 2004 are derived from our unaudited consolidated financial statements which are included elsewhere in this prospectus. The selected consolidated statement of operations data for the fiscal years ended June 30, 1999 and 2000 and the selected balance sheet data as of June 30, 1999, 2000 and 2001 are derived from the audited financial statements which are not included in this prospectus. The pro forma share information included in the consolidated statement of operations data has been computed as described in Note 2 to the consolidated financial statements. Historical results are not necessarily indicative of the results to be expected for any interim period or for the year as a whole.

 

     Fiscal Year Ended June 30,

    Nine Months
Ended March 31,


 
     1999

    2000

    2001

    2002

    2003

    2003

    2004

 
                                   (Unaudited)  
     (in thousands, except share and per share data)  

Net sales

   $ 3,902     $ 26,887     $ 45,730     $ 70,245     $ 88,684     $ 54,445     $ 76,917  

Cost of sales

     2,783       17,881       27,095       40,328       49,996       31,292       42,239  
    


 


 


 


 


 


 


Gross profit

     1,119       9,006       18,635       29,917       38,688       23,153       34,678  

Operating expenses:

                                                        

Selling and marketing

     2,626       26,636       14,676       15,060       18,673       12,173       16,968  

General and administrative

     1,595       7,598       7,094       9,719       11,187       7,907       10,109  

Information technology systems

     755       3,603       4,016       3,963       3,565       2,536       2,900  

Amortization of goodwill

     55       1,944       6,754       —         —         —         —    

Stock-based compensation

     —         1,659       1,741       483       411       311       1,304  
    


 


 


 


 


 


 


Total operating expenses

     5,031       41,440       34,281       29,225       33,836       22,927       31,281  
    


 


 


 


 


 


 


Operating income (loss) from continuing operations

     (3,912 )     (32,434 )     (15,646 )     692       4,852       226       3,397  

Minority interest in loss of consolidated subsidiary

     —         26       298       —         —         —         —    

Other income (expense), net

     77       33       267       (357 )     (183 )     (422 )     186  
    


 


 


 


 


 


 


Income (loss) from continuing operations before income tax

     (3,835 )     (32,375 )     (15,081 )     335       4,669       (196 )     3,583  

Income tax provision (benefit)

     —         —         —         —         337       —         (11,768 )
    


 


 


 


 


 


 


Income (loss) from continuing operations

     (3,835 )     (32,375 )     (15,081 )     335       4,332       (196 )     15,351  

Loss from discontinued operations

     —         —         (797 )     (643 )     —         —         —    
    


 


 


 


 


 


 


Net income (loss)

     (3,835 )     (32,375 )     (15,878 )     (308 )     4,332       (196 )     15,351  

Preferred stock dividend

     —         —         —         —         —         —         (1,500 )
    


 


 


 


 


 


 


Net income (loss) attributable to common stockholders

   $ (3,835 )   $ (32,375 )   $ (15,878 )   $ (308 )   $ 4,332     $ (196 )   $ 13,851  
    


 


 


 


 


 


 


Income (loss) per share from continuing operations:

                                                        

Basic

   $ (0.93 )   $ (7.07 )   $ (2.98 )   $ 0.06     $ 0.76     $ (0.03 )   $ 1.93  

Diluted

   $ (0.93 )   $ (7.07 )   $ (2.98 )   $ 0.03     $ 0.39     $ (0.03 )   $ 1.28  

Loss per share from discontinued operations:

                                                        

Basic

   $ —       $ —       $ (0.16 )   $ (0.12 )   $ —       $ —       $ —    

Diluted

   $ —       $ —       $ (0.16 )   $ (0.12 )   $ —       $ —       $ —    

Net income (loss) per common share:

                                                        

Basic

   $ (0.93 )   $ (7.07 )   $ (3.14 )   $ (0.06 )   $ 0.76     $ (0.03 )   $ 1.74  

Diluted

   $ (0.93 )   $ (7.07 )   $ (3.14 )   $ (0.06 )   $ 0.39     $ (0.03 )   $ 1.16  

 

32


Table of Contents
     Fiscal Year Ended June 30,

   Nine Months Ended
March 31,


     1999

    2000

   2001

   2002

    2003

   2003

   2004

                                (Unaudited)
     (in thousands, except share and per share data)

Weighted average common shares outstanding:

                                                

Basic

     4,134,019       4,578,695      5,057,787      5,248,964       5,682,518      5,695,123    7,967,690
    


 

  

  


 

  

  

Diluted

     4,134,019       4,578,695      5,057,787      9,609,344       11,206,693      5,695,123    11,966,640
    


 

  

  


 

  

  
     As of June 30,

   As of
March 31,


    
     1999

    2000

   2001

   2002

    2003

   2004

    
                                (Unaudited)     
     (in thousands)     

Balance Sheet Data:

                                                

Cash and cash equivalents

   $ 605     $ 11,353    $ 8,459    $ 4,923     $ 11,496    $ 51,784     

Working capital

     (233 )     6,117      426      (830 )     3,789      38,913     

Total assets

     2,684       22,723      13,060      10,260       17,334      74,963     

Long-term debt, less current portion

     —         1,001      2,514      —         48      —       

Convertible preferred stock

     —         6      6      6       6      —       

Common stock

     4       6      6      6       6      11     

Total stockholders’ equity

   $ 94     $ 14,721    $ 485    $ 2,246     $ 7,097    $ 56,976     

 

33


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. This discussion may contain forward-looking statements, including those described in the “Forward-Looking Statements” section above, that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the factors described in the “Risk Factors” section above and elsewhere in this prospectus. Except as may be required by applicable law, we undertake no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

 

Overview

 

We operate an e-commerce marketplace of websites for perishable goods that consistently delivers fresh, high-quality products direct from the supplier to the customer at competitive prices. We combine an online storefront, proprietary supply chain management technology, established supplier relationships and an integrated logistical relationship with FedEx to create a market platform that bypasses traditional supply chains of wholesalers, distributors and retailers. The benefits to our customers include freshness, quality, price and selection, all with a guaranteed delivery date. The benefits to our suppliers include enhanced margins, broader customer reach and better inventory management. We believe our business model is highly scalable with low capital investment requirements beyond our existing technology and systems and minimal inventory carrying costs.

 

We plan to assess and target additional categories based on our market platform’s ability to add value by streamlining the supply chain for the benefit of customers and suppliers. We have identified premium meat and fresh premium fruit as initial categories where we believe we can leverage our customer base, marketing and distribution relationships and infrastructure. In October 2003, we launched and are now operating Uptown Prime at www.uptownprime.com, offering premium meats and now premium seafood, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium fruits.

 

We were incorporated in February 1998 and officially launched our website, www.proflowers.com, in August 1998. Since inception, we have focused on developing our supply chain management technology, refining our relationship with FedEx, generating flower sales, establishing and promoting our brands, pursuing relationships with other retailers, and preparing to launch websites featuring additional product offerings.

 

In December 2003, we completed an initial public offering whereby 4,334,000 shares of our common stock were sold at an offering price of $15 per share. Of the 4,334,000 shares sold, 2,666,667 were sold by us and an aggregate of 1,667,333 shares were sold by selling stockholders. In January 2004, the underwriter’s over-allotment option was exercised whereby 316,100 shares of our common stock were sold at an offering price of $15 per share; all of said shares were sold by selling stockholders. We received net proceeds of approximately $34.6 million in connection with the offering. In addition, 221,715 shares of outstanding Series A preferred stock were converted into 760,383 shares of common stock and 5,816,285 shares of outstanding Series B preferred stock were converted into 2,104,853 shares of common stock.

 

To date, we have derived our revenues primarily from the sale of flowers, plants and gifts from our www.proflowers.com website. For the three months ended March 31, 2004, we reported net sales of $40.7 million, an increase of 41.5% from $28.8 million for the three months ended March 31, 2003, and net income of $15.9 million as compared to net income of $2.5 million for the same quarter in the prior year. For the nine months ended March 31, 2004, we reported net sales of $76.9 million, an increase of 41.3% from $54.4 million for the nine months ended March 31, 2003, and net income of $15.4 million as compared to a net loss of $(0.2) million for the same period in the prior year. During the nine months ended March 31, 2004, we reassessed the valuation allowance previously established against our net deferred tax assets and released the remaining allowance of approximately $12.2 million, resulting in the recognition of a tax benefit of $11.8 million.

 

34


Table of Contents

Our net sales increased to $88.7 million for fiscal 2003 from $70.2 million for fiscal 2002. We generated annual net income for the first time during fiscal 2003 of $4.3 million, with operating income from continuing operations of $4.9 million. This compares to a net loss of ($0.3) million and operating income from continuing operations of $0.7 million during fiscal 2002. Since inception we have incurred significant losses. As of March 31, 2004, we have an accumulated deficit of $35.1 million.

 

We use our market platform to manage the delivery of flowers from the supplier to the consumer in a manner that reduces our inventory risk. We do not take title to flowers shipped direct from our growers to our customers until pick-up by FedEx. We take title to flowers from growers outside the U.S. that we briefly maintain as inventory while in-transit to one of our distribution facilities and while being prepared and packaged for shipping. Our longer-term inventory consists of grower shipping supplies, including boxes, and accessories, including plush toys, chocolates and flower vases.

 

Results of Operations

 

The following table sets forth our results of operations expressed as a percentage of net sales:

 

       Fiscal Year Ended
June 30,


       Nine Months Ended
March 31,


 
       2001

     2002

     2003

       2003

     2004

 

Consolidated Statement of Operations Data:

                                      

Net sales

     100.0 %    100.0 %    100.0 %      100.0 %    100.0 %

Cost of sales

     59.2      57.4      56.4        57.5      54.9  
      

  

  

    

  

Gross profit

     40.8      42.6      43.6        42.5      45.1  

Operating expenses:

                                      

Selling and marketing

     32.1      21.4      21.0        22.3      22.1  

General and administrative

     15.5      13.8      12.6        14.5      13.1  

Information technology systems

     8.8      5.7      4.0        4.7      3.8  

Amortization of goodwill

     14.8      —        —          —        —    

Stock-based compensation

     3.8      0.7      0.5        0.6      1.7  
      

  

  

    

  

Total operating expenses

     75.0      41.6      38.1        42.1      40.7  
      

  

  

    

  

Operating income (loss) from continuing operations

     (34.2 )    1.0      5.5        0.4      4.4  

Minority interest in loss of consolidated subsidiary

     0.6      —        —          —        —    

Other income (expense), net

     0.6      (0.5 )    (0.2 )      (0.8 )    0.3  
      

  

  

    

  

Income (loss) from continuing operations before income tax

     (33.0 )    0.5      5.3        (0.4 )    4.7  

Income tax provision (benefit)

     —        —        0.4        —        (15.3 )
      

  

  

    

  

Income (loss) from continuing operations

     (33.0 )    0.5      4.9        (0.4 )    20.0  

Loss from discontinued operations

     (1.7 )    (0.9 )    —          —        —    
      

  

  

    

  

Net income (loss)

     (34.7 )%    (0.4 )%    4.9 %      (0.4 )%    20.0 %
      

  

  

    

  

 

Comparison of Nine Months Ended March 31, 2003 and 2004

 

Net Sales

 

Our net sales are derived primarily from the sale of flowers, plants and gifts from our proflowers.com website. We also generate net sales from fees that we receive from retailers for whom we design and operate websites to sell perishable products under their own brands.

 

     Nine Months Ended March 31,

 
     2003

   2004

   % Increase
(Decrease)


 
     (In millions, except percentages)  

Net sales

   $ 54.4    $ 76.9    41.3 %

 

35


Table of Contents

The increase in sales for the nine months ended March 31, 2004, compared to the same period last year resulted primarily from an increase in the number of orders by new and existing customers, as shown below.

 

       Nine Months Ended March 31,

 
       2003

     2004

     % Increase
(Decrease)


 

Database of customers at period end

       1,900,000        2,700,000      42.1 %

Orders placed by existing customers

       561,000        804,000      43.3 %

Revenue from repeat orders (in millions)

     $ 28.8      $ 40.7      41.3 %

New customers

       414,000        583,000      40.8 %

Average order value

     $ 48.83      $ 49.24      0.8 %

 

Growth in the number of new customers for the nine months ended March 31, 2004 is a result of our advertising and marketing campaigns which are designed to attract and maintain customers. We believe continued strength in repeat orders is a result of our strong customer satisfaction and our retention marketing efforts.

 

In October 2003, we launched and are now operating Uptown Prime at www.uptownprime.com offering premium meats and now premium seafood, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium fruits. We expect premium meat and fresh premium fruit net sales to grow in significance to our business as we develop and deploy our premium meat and fresh premium fruit websites. We expect that approximately 1.5% of our revenues will be derived from premium meats and fresh premium fruits in fiscal 2004. You must consider our prospects for expanding our premium meat and fresh premium fruit revenues during fiscal 2004 and beyond in light of the risks associated with expanding into new product categories and the other risks outlined in “Risk Factors” above.

 

We intend to grow our existing flower and new meat, fruit and other product categories via arrangements with other branded retailers and direct marketers. We offer a variety of arrangements for branded retailers or direct marketers that want to use our market platform to offer perishable products, including a co-branded website, a private label website or a hybrid of the two. The arrangements are currently structured to involve a combination of revenue sharing and fee-based agreements. For revenue sharing agreements, we pay the retailer a portion of the revenues generated from its website. Fee-based retailer arrangements involve a combination of up- front development costs and per-transaction fees paid to us by the retailer. Currently, our branded retailer arrangements regardless of the payment structure represent an immaterial percentage of our net sales for the nine months ended March 31, 2004 and in fiscal 2003. You must consider our prospects for expanding through relationships with other branded retailers and direct marketers in light of the risks outlined in “Risk Factors” above.

 

Gross Profit

 

Our gross profit consists of net sales less cost of sales. Our cost of sales consists primarily of flower and other product costs and shipping charges. Other costs included in cost of sales are grower and delivery supply costs, distribution facility labor costs and the cost of replacement products.

 

       Nine Months Ended March 31,

 
       2003

    2004

    % Increase
(Decrease)


 
       (In millions, except percentages)  

Gross profit

     $ 23.2     $ 34.7     49.8 %

Gross profit percentage

       42.5 %     45.1 %   6.1 %

 

The increase in the gross margin in absolute dollars for the first nine months of the year compared to the same period last year is a result of the strong growth in revenues. In addition, we experienced a more profitable

 

36


Table of Contents

mix of product lines and products, a decline in the cost of our accessories due to renegotiating certain costs, very low growth in the per unit cost of our products and a reduced sales tax expense due to collecting a higher percentage of remitted sales taxes from our customers.

 

The increase in the gross profit percentage year-to-date compared to the same period last year was a result of focused marketing to more profitable product lines and products—particularly within our business-to-business sales activities—and costs savings in product and accessory costs along with a reduction in sales tax expense due to improved collections.

 

We expect that our gross profit will fluctuate in the future as we expand into new product categories based upon our product mix, average order value, product costs, shipping costs, product return and refund rates and handling and packaging costs for the various products.

 

Selling and Marketing

 

Our selling and marketing expenses consist primarily of advertising costs, wages and related payroll benefits for our category development and marketing and customer service staff, affiliate fees and commissions, focus groups and other research expenses. Advertising expenses are generally expensed as incurred. For advertising contracts which cover an extended period of time, the costs are expensed over the life of the contract based on the specifics of the contract, such as orders placed, radio spots run or Internet advertisements placed. Our advertising efforts target the acquisition of new customers and repeat orders from existing customers.

 

       Nine Months Ended March 31,

 
       2003

    2004

    % Increase
(Decrease)


 
       (In millions, except percentages)  

Selling and marketing

     $ 12.2     $ 17.0     39.4 %

As a percent of net sales

       22.3 %     22.1 %   (0.9 )%

 

The increase in the marketing for the nine months ended March 31, 2004 compared to the same period in fiscal 2003 is primarily due to an increase in on-line and off-line advertising and promotional costs which grew faster than our revenue as a result of increased marketing activities in order to generate additional revenue. This includes increased activity in direct on-line advertising and radio advertising. In addition, we had an increase in wages and wage related expenses as our marketing staff headcount has increased in order to drive increases in revenue.

 

The decrease in marketing costs for the nine months ended March 31, 2004 as a percentage of net sales compared to the same period last year was caused primarily by a decrease in payroll costs as a percentage of sales, as revenue increased faster than payroll costs and a decrease in our outside public relations costs as the work was brought in-house. These cost savings were partially offset by an increase in the cost of on-line and off-line advertising.

 

We expect selling and marketing expenses to continue to increase in absolute dollars in the future as a result of continued expansion of our sales and marketing infrastructure in support of a broader product portfolio. While we currently expect selling and marketing expenses to increase in absolute dollars, we expect them to remain generally comparable as a percentage of net sales throughout fiscal 2004.

 

General and Administrative

 

Our general and administrative expenses consist primarily of wages and related payroll benefits for all of our employees, except those associated with fulfillment, customer service, technology and sales and marketing employees. These expenses also include credit card fees, facilities costs (other than facilities costs associated

 

37


Table of Contents

with cost of goods sold), bad debt expense, travel, legal and accounting professional fees, insurance, phone, utilities, other facility-related expenses and other general corporate expenses.

 

       Nine Months Ended March 31,

 
       2003

    2004

    % Increase
(Decrease)


 
       (In millions, except percentages)  

General and administrative

     $ 7.9     $ 10.1     27.8 %

As a percent of net sales

       14.5 %     13.1 %   (9.7 )%

 

The increase in absolute general and administrative expenses for the nine months ended March 31, 2004 compared to the same period last year is primarily due to an increase in bad debts due to chargebacks on credit cards, an increase in salaries and related payroll benefits and an increase in insurance costs as a result of becoming a public company. The decline as a percentage of net sales was caused primarily by our rapid revenue growth, which outpaced our growth in general and administrative expenses.

 

We expect general and administrative expenses to continue to increase in absolute dollars in the future as a result of continued expansion of our administrative infrastructure in support of a broader technology and product portfolio and increased expenses associated with being a public company. However, we also anticipate that general and administrative expenses will continue to decrease as a percentage of net sales as a result of net sales growing faster than general and administrative expenses.

 

Information Technology Systems

 

Our information technology system expenses consist primarily of wages and related payroll benefits for information technology personnel, engineering consulting expenses, quality assurance and testing costs and outside services, including hosting of our Internet servers. Information technology system expenses are expensed as incurred. Information technology system expenses are net of software capitalization of major site and product development efforts under Statement of Position 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use.

 

       Nine Months Ended March 31,

 
       2003

    2004

    % Increase
(Decrease)


 
       (In millions, except percentages)  

Information technology

     $ 2.5     $ 2.9     14.4 %

As a percent of net sales

       4.7 %     3.8 %   (19.1 )%

 

The increase in information technology costs in absolute dollars for the first nine months of the year compared to the same period last year is a result of an increase in payroll and related benefits and an increase in the use of contract labor for software development. The payroll and contract labor increases are required to support the infrastructure necessary for continued growth of revenues.

 

The decline as a percentage of net sales for the nine months ended March 31, 2004 as compared to the same periods in the previous year was caused primarily by our rapid revenue growth, which outpaced our growth in information technology system expenses combined with capitalized information technology expenditures.

 

We expect information technology system expenses to increase in absolute dollars in fiscal 2004 compared to fiscal 2003 and to continue to decrease as a percentage of net sales as a result of net sales growing faster than information technology system expenses.

 

38


Table of Contents

Stock-based Compensation

 

Stock-based compensation consists primarily of amortization of deferred stock-based compensation under SFAS No. 123.

 

       Nine Months Ended March 31,

 
       2003

    2004

    % Increase
(Decrease)


 
       (In millions, except percentages)  

Stock-based Compensation

     $ 0.3     $ 1.3     319.3 %

As a percent of net sales

       0.6 %     1.7 %   183.3 %

 

Stock-based compensation for the first nine months of the year increased as a result of the amortization of expense related to the grant of options prior to our initial public offering and options granted to newly hired employees after our initial public offering. Prior to fiscal 2003, we accounted for stock-based employee compensation arrangements under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Effective July 1, 2002, we adopted the fair value recognition provisions of SFAS No. 123. We selected the prospective method of adoption described in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. This method applies fair value accounting to all new grants and modification or settlement of old grants after the beginning of the year of adoption. All grants prior to our adoption of SFAS No. 123 will continue to be accounted for under the intrinsic value provision of APB No. 25.

 

Other Income (Expense), Net

 

Other income (expense), net included in the consolidated statements of operations includes interest and dividend income and interest expense.

 

       Nine Months Ended March 31,

       2003

    2004

    % Increase
(Decrease)


       (In millions, except percentages)

Other Income (expense), net

     $ (0.4 )   $ 0.2     N/A

As a percent of net sales

       (0.8 )%     0.3 %   N/A

 

The improvement in other income for the year-to-date compared to the same period last year was a result of a reduction in interest expense related to warrants issued in connection with our bank line of credit which was terminated in October 2003. In addition, interest income was higher than last year as a result of an increased cash balance throughout the quarter and as a result of our initial public offering in December 2003 and cash generated from operations.

 

Income Tax Benefit

 

       Nine Months Ended March 31,

       2003

     2004

     % Increase
(Decrease)


       (In millions, except percentages)

Income tax benefit

     $  —        $ 11.8      N/A

 

The income tax benefit reflects a benefit of $12.2 million from the removal of the valuation allowance, net of income tax expense on operations in the amount of $(0.4) million for the nine months ended March 31, 2004. A valuation allowance was originally recorded against our net deferred tax assets, which primarily consist of net operating loss carryforwards. The valuation allowance was originally established because we had not reached certain financial thresholds to be able to determine that it was more likely than not that we would generate future income to offset the net operation loss carryforwards.

 

39


Table of Contents

During the nine months ended March 31, 2004, we reassessed the valuation allowance previously established against net deferred tax assets. Factors we considered included: our earnings history, projected earnings based on current operations, and projected future taxable income. Based on this evidence, we concluded that it is more likely than not that the deferred tax assets would be realized. Accordingly, we released the remaining valuation allowance of approximately $12.2 million against our deferred tax assets which consist primarily of net operating loss carryforwards.

 

The reversal of the valuation allowance recognized our deferred tax assets, and resulted in the recognition of a tax benefit in the nine months ended March 31, 2004. The favorable impact of the tax benefit has distorted the trends in our net income and will impact the comparability of our net income with other periods.

 

Net Income (Loss)

 

       Nine Months Ended March 31,

       2003

    2004

    % Increase
(Decrease)


       (In millions, except percentages)

Net income (loss)

     $ (0.2 )   $ 15.4     N/A

As a percent of net sales

       (0.4 )%     20.0 %   N/A

 

The change in net income (loss) is a result of the changes in revenues and expenses as previously discussed.

 

Comparison of Fiscal 2003, 2002 and 2001

 

Net Sales

 

Net sales for the fiscal year increased 26.2% and 53.6% for fiscal 2003 and fiscal 2002, respectively, to $88.7 million in fiscal 2003 from $70.2 million in fiscal 2002 and $45.7 million in fiscal 2001. The increase in net sales in fiscal 2003 and 2002 resulted primarily from an increase in the number of repeat orders from our existing customer base, an increase in the number of orders by new customers and an increase in our average order value. Less than 1.0% of net sales revenue was from merchandise shipped outside the U.S. in each of fiscal years 2003, 2002 and 2001.

 

Our existing number of customers at June 30, 2003 was approximately 2.1 million, an increase of 50.0% over our June 30, 2002 existing number of customers of approximately 1.4 million, which was an increase of 69.7% over our June 30, 2001 existing number of customers of approximately 825,000. In fiscal 2003, existing customers placed approximately 941,000 orders, an increase of 30.9% over orders placed in fiscal 2002 by existing customers of approximately 719,000, which was an increase of 60.5% over the orders placed in fiscal 2001 by existing customers of approximately 448,000. Our number of new customers in fiscal 2003 was approximately 707,000, an increase of 16.1% over our fiscal 2002 new customer number of approximately 609,000, which was an increase of 38.7% over our fiscal 2001 new customer number of approximately 439,000. Our average order value in fiscal 2003 was $48.59, an increase of 4.6% over our fiscal 2002 average order value of $46.46, which was an increase of 2.2% over our fiscal 2001 average order value of $45.47.

 

Gross Profit

 

Gross profit for the fiscal year increased 29.3% and 60.5% for fiscal 2003 and fiscal 2002, respectively, to $38.7 million in fiscal 2003 from $29.9 million in fiscal 2002 and $18.6 million in fiscal 2001. The increases in absolute dollars were due to increases in sales volume. Our gross profit percentage improved to 43.6% of net sales for fiscal 2003, from 42.6% in fiscal 2002 and 40.8% in fiscal 2001. The increase in gross profit percentage in fiscal 2003 was a result of the increase in average order value and a decrease in flower cost, which was partially offset by an increase in the average shipping cost. The increase in gross profit percentage in fiscal 2002 was a result of a decrease in flower costs, which was partially offset by an increase in average shipping costs and an increase in the cost of product fulfillment.

 

40


Table of Contents

Selling and Marketing

 

Selling and marketing expenses for the fiscal year increased 24.0% and 2.6% for fiscal 2003 and fiscal 2002, respectively, to $18.7 million in fiscal 2003 from $15.1 million in fiscal 2002 and $14.7 million in fiscal 2001. The increase in fiscal 2003 is primarily due to increases of 54.6% for fiscal 2003 and 19.8% for fiscal 2002 in online advertising and promotional costs, each resulting from increased sales activities, and an increase of 70.7% for fiscal 2003 and 120.2% for fiscal 2002 in wages and related payroll benefits due to increased headcount of 15.6% for fiscal 2003 and 7.6% for fiscal 2002. The increase in fiscal 2002 is primarily due to increases in online advertising, partially offset by a decrease in radio advertising and an increase in promotional costs. As a percentage of net sales, selling and marketing expenses were 21.0% for fiscal 2003, down from 21.4% for the prior fiscal year and 32.1% during fiscal 2001. The decline as a percentage of net sales was caused primarily by a decrease in the cost of acquiring new customers, more focused marketing activities and higher customer retention rates.

 

General and Administrative

 

General and administrative expenses for the fiscal year increased 15.1% and 37.0% for fiscal 2003 and fiscal 2002, respectively, to $11.2 million in fiscal 2003 from $9.7 million in fiscal 2002 and $7.1 million in fiscal 2001. The increases are primarily due to increased salaries and related payroll benefits of 16.3% for fiscal 2003 and 11.7% for fiscal 2002, and because of our increased sales transaction volume, increased credit card fees, credit card bad debts and credit card chargebacks of 19.2% for fiscal 2003 and 55.7% for fiscal 2002. As a percentage of net sales, general and administrative expenses were 12.6% for fiscal 2003, down from 13.8% for fiscal 2002 and 15.5% for fiscal 2001. The decline as a percentage of net sales was caused primarily by our rapid revenue growth, which outpaced our growth in general and administrative expenses.

 

Information Technology Systems

 

Information technology system expenses decreased 10.0% to $3.6 million in fiscal 2003 from $4.0 million in both fiscal 2002 and fiscal 2001. In fiscal 2003 and 2002, the decrease in absolute dollars is primarily due to an increase in capitalized information technology expenditures for software development, which was partially offset by an increase in wages and related payroll benefits of 15.3% for fiscal 2003 and a decrease of 2.2% for fiscal 2002. As a percentage of net sales, information technology system expenses were 4.0% for fiscal 2003, down from 5.7% for fiscal 2002 and 8.8% for fiscal 2001. In fiscal 2003, the decline as a percentage of net sales was caused primarily by our rapid revenue growth, which outpaced our growth in information technology system expenses.

 

Amortization of Goodwill

 

Our amortization of goodwill consists of decreases in the value of goodwill associated with assets or entities we acquired prior to the adoption of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets. There was no amortization of goodwill in fiscal 2002 or fiscal 2003. The approximately $6.8 million included in amortization of goodwill in fiscal 2001 is related to our 1999 acquisition of Flower Farm Direct, Inc. In December 1999, we purchased Flower Farm, a Florida company, for 3,724,197 shares of our common stock. In connection with the acquisition, we recognized goodwill in the amount of approximately $9.0 million, approximately $6.8 million of which we amortized and subsequently wrote off during fiscal 2001.

 

Stock-based Compensation

 

Stock-based compensation for fiscal 2003 decreased 14.9% to $411,000 from $483,000 in fiscal 2002. Stock-based compensation decreased 72.3% for fiscal 2002 from $1.7 million in fiscal 2001. The increase in fiscal 2003 was due to our adoption of SFAS No. 123, Accounting for Stock-based Compensation. Prior to fiscal 2003, we accounted for stock-based employee compensation arrangements under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related

 

41


Table of Contents

interpretations. Effective July 1, 2002, we adopted the fair value recognition provisions of SFAS No. 123. We selected the prospective method of adoption described in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. This method applies fair value accounting to all new grants and modification or settlement of old grants after the beginning of the year of adoption. All grants from prior to our adoption of SFAS No. 123 will continue to be accounted for under the intrinsic value provision of APB No. 25. The decrease of approximately $1.3 million in fiscal 2002 as compared to fiscal 2001 was due to a decrease in amortization of restricted stock associated with our acquisition of Flower Farm.

 

Other Income (Expense), Net

 

Other income (expense), net, for fiscal 2003 decreased by $174,000 from fiscal 2002 as a result of a decrease in interest expense resulting from the amortization of costs associated with stock and warrants issued in relation to our Comerica Bank—California line of credit, which we terminated in October 2003, and an increase in interest income resulting from increased average cash balances. Other (expense), net, for fiscal 2002 increased by $624,000 from fiscal 2001 as a result of an increase in interest expense on borrowings for working capital, amortization of debt issuance costs associated with stock and warrants issued in relation to the Comerica Bank—California line of credit, which we terminated in October 2003, and decreased interest income as a result of decreased average cash balances during the year.

 

Income Taxes

 

As of June 30, 2003, we had aggregate net operating loss carryforwards of approximately $35.4 million for federal income tax purposes, which expire in tax years 2019 through 2021. We have aggregate net operating loss carryforwards for California state tax purposes of $23.5 million as of June 30, 2003, which expire in tax years 2008 through 2013. California has suspended the use of net operating loss carryforwards for tax years 2002 and 2003.

 

For fiscal 2003, we provided for income tax of $337,000 relating to state income taxes accrued in fiscal 2003, as compared to no provision for tax in fiscal 2002 and 2001. Based on the then existing information, we believed that the available objective evidence created uncertainty regarding the realizability of the deferred tax assets such that we had recorded a full valuation allowance. These factors include our history of losses, the fact that the market in which we operate is intensely competitive, the lack of carryback capacity to realize deferred tax assets and the uncertainty regarding market acceptance of our new and existing product categories.

 

Discontinued Operations

 

Discontinued operations are comprised of losses from the discontinued operation of our indirect subsidiary, Flowerfarm Kubushiki Kaisha, which we acquired when we acquired Flower Farm Direct in December 1999.

 

The subsidiary sold flowers online and distributed flowers and fulfilled orders in Japan. In connection with our decision in fiscal 2002 to focus on domestic operations, including the generation and handling of international sales from within the U.S., we terminated our acquired interest in Flowerfarm Kubushiki Kaisha and ceased operations in November 2001. The loss from discontinued operations was $0 in fiscal 2003 as compared to $643,000 in 2002 and $797,000 in 2001. As of March 31, 2004, we do not have any subsidiaries or other operations that we account for as discontinued operations.

 

Net Income (Loss)

 

As a result of the previously described elements, our net income for fiscal 2003 was $4.3 million, as compared to a net loss of ($308,000) for fiscal 2002 and a net loss of ($15.9 million) for fiscal 2001. For fiscal 2003, net income percentage stood at 4.9% of net sales and for fiscal 2002 and 2001, net loss percentage was (0.4%) and (34.7%), respectively.

 

42


Table of Contents

Liquidity and Capital Resources

 

Since our inception, we have financed our operations through sales of stock, and, more recently, internally generated cash flows from operations. At March 31, 2004, we had working capital of $38.9 million. This represents a $35.1 million increase over working capital of $3.8 million at June 30, 2003. The increase in working capital at March 31, 2004 over June 30, 2003 resulted primarily from the receipt of the net proceeds of $34.6 million from our initial public offering, completed in December 2003. At March 31, 2004, we had cash of $51.8 million. This represents a 350.5% increase over cash of $11.5 million at June 30, 2003. The increase in cash at March 31, 2004 over June 30, 2003 resulted primarily from the receipt of the net proceeds of $34.6 million from our initial public offering, completed in December 2003.

 

At June 30, 2003, we had working capital of $3.8 million. This represents a $4.6 million increase over working capital of ($830,000) at June 30, 2002, which is a $1.3 million decrease from working capital of $426,000 at June 30, 2001. The increase in working capital at the end of fiscal 2003 resulted primarily from increased earnings from operations, offset in part by capital expenditures. The decrease in working capital in fiscal 2002 was positively affected by earnings from operations offset by capital expenditures and a reduction of long-term debt. At June 30, 2003, we had cash of $11.5 million. This represents a 133.5% increase over cash of $4.9 million at June 30, 2002, which is a 41.8% decrease from cash of $8.5 million at June 30, 2001. The increase in cash at the end of fiscal 2003 resulted primarily from increased earnings, offset in part by capital expenditures. The decrease in cash in fiscal year ended June 30, 2002 resulted primarily from decreased earnings and a reduction of long-term debt.

 

Net cash provided by operating activities was $9.5 million for the nine months ended March 31, 2004. The generation of cash from operations during the nine months ended March 31, 2004 is primarily a result of an increase in current liabilities in combination with cash flow from revenues, less expense—net of non-cash expenses such as depreciation and stock-based compensation. The increase in accounts payable and other accrued liabilities is primarily due to the increase in costs associated to increased sales activity during the second half of the year. The majority of the accounts payable and accrued liabilities at March 31, 2004 will be paid in the fourth quarter of fiscal 2004.

 

Net cash provided by operating activities was $8.5 million and $1.3 million, for fiscal 2003 and fiscal 2002, respectively, compared to net cash used in operating activities of $3.3 million for fiscal 2001. The improvement in cash flows from operations is primarily a result of increases in net income in fiscal 2003 as compared to fiscal 2002 and the decrease in the net loss in fiscal 2002 as compared to fiscal 2001.

 

We use cash in investing activities primarily to purchase computer hardware and software, office equipment and fixtures. Cash used in investing activities totaled $2.3 million in the nine months ended March 31, 2004. Cash used in investing activities totaled $1.7 million in the nine months ended March 31, 2003. Cash used in investing activities totaled $2.0 million, $1.6 million and $566,000 in fiscal 2003, 2002 and 2001, respectively.

 

Net cash provided by financing activities was $33.1 million for the nine months ended March 31, 2004. Cash provided by financing activities for the nine months ended March 31, 2004 consists primarily of proceeds from our initial public offering net of associated costs in our second fiscal quarter offset by a cash dividend to preferred shareholders in the first fiscal quarter. Upon completion of our initial public offering, the preferred stock outstanding was converted to common stock. We currently intend to retain all available funds to support our operations and to finance the growth and development of our business.

 

Net cash used in financing activities was $16,000 for fiscal 2003 and $2.8 million in fiscal 2002, and cash provided by financing activities totaled $1.6 million for fiscal 2001. Cash flows from financing activities consist primarily of proceeds from long-term debt and repayment of long-term debt. In August 2003, we paid a special cash dividend on our then-issued and outstanding Series A and Series B preferred stock in the aggregate total amount of $1.5 million. We currently intend to retain all available funds to support our operations and to finance the growth and development of our business.

 

43


Table of Contents

In January 2002, we entered into a one year loan and security agreement with Comerica Bank—California. In January 2003, we entered into an amended and restated loan and security agreement with Comerica Bank—California that provides for a maximum revolving line of credit of $1.5 million, with an additional line of $1.5 million available from May 1 through May 20, 2003 and from January 15 through February 20, 2004. We did not use the line of credit in fiscal 2004 and we terminated the line of credit effective October 2003. The average outstanding balance under this line of credit was $700,000 for one consecutive 14-day period in fiscal 2003 and $2.2 million for one consecutive 13-day period in fiscal 2002. Borrowings under this line of credit were $0 at September 30, 2003, June 30, 2003 and June 30, 2002.

 

At June 30, 2003, we had no material commitments other than purchase commitments in the ordinary course of business and obligations under our non-cancelable lease agreements. Future payments due under long-term contractual obligations as of June 30, 2003 are described below:

 

     Payments Due by Period

     Total

   Less than
1 year


   1-3 years

   3-5 years

     (in thousands)

Description of Contractual Obligations

                           

Capital lease obligations

   $ 180    $ 131    $ 49    $
 
 —
  

Operating lease obligations

     2,163      1,188      948      27

Online marketing agreements

     3,200      3,200      —        —  
    

  

  

  

Total

   $ 5,543    $ 4,519    $ 997    $ 27
    

  

  

  

 

We have entered into a one year online marketing agreement to secure web advertising with Microsoft Corporation. We cannot terminate this agreement without purchasing our guaranteed quota of $3.2 million in advertising in fiscal 2004, $2.4 million of which had been purchased as of March 31, 2004. Under this agreement, we receive the rights to search specified key words and featured site placements designed to deliver consumers to our website from search results from Microsoft’s website search engine.

 

We believe that our available cash and cash flows from operations will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next 12 months. Changes in our operating plans, lower than anticipated revenues, increased expenses or other events, including those described in “Risk Factors,” may cause us to seek additional debt or equity financing in the future. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate our business.

 

Quarterly Results of Operations and Seasonality

 

The following table sets forth the unaudited quarterly results of operations, as well as the same data expressed as a percentage of our total revenues for the periods indicated. The information for each quarter is unaudited and we have prepared it on the same basis as the audited consolidated financial statements appearing elsewhere in this prospectus. This information includes all adjustments management considers necessary for the fair presentation of such data. The results of historical periods are not necessarily indicative of results for any future period.

 

Due to the nature of the products that we sell, our revenues are highly seasonal around the major gift-giving holidays. A large percentage of our annual floral revenues are generated during the months of February, due to Valentine’s Day, and May, due to Mother’s Day. Other significant floral gift-giving holidays include Easter, Christmas and Thanksgiving.

 

44


Table of Contents
    Quarter Ended

 
   

Sept. 30,

2001


   

Dec. 31,

2001


   

March 31,

2002


    June 30,
2002


    Sept. 30,
2002


    Dec. 31,
2002


    March 31,
2003


    June 30,
2003


  Sept. 30,
2003


    Dec. 31,
2003


  March 31,
2004


 
    (in thousands, except per share data)  
Consolidated Statement of Operations Data:                                                                                    

Net sales

  $ 6,707     $ 13,815     $ 25,031     $ 24,692     $ 9,336     $ 16,351     $ 28,758     $ 34,239   $ 12,950     $ 23,278   $ 40,689  

Cost of sales

    3,987       7,935       14,341       14,065       5,618       9,726       15,948       18,704     7,335       13,110     21,794  
   


 


 


 


 


 


 


 

 


 

 


Gross profit

    2,720       5,880       10,690       10,627       3,718       6,625       12,810       15,535     5,615       10,168     18,895  
   


 


 


 


 


 


 


 

 


 

 


Operating expenses:

                                                                                   

Selling and marketing

    2,104       3,219       5,280       4,457       2,348       3,683       6,142       6,500     2,785       5,308     8,845  

General and administrative

    2,166       2,303       2,984       2,266       2,371       2,405       3,131       3,280     2,579       3,127     4,433  

Information technology systems

    1,066       887       1,069       941       1,018       597       921       1,029     812       1,020     1,068  

Stock-based compensation

    174       126       92       91       135       120       56       100     188       569     547  
   


 


 


 


 


 


 


 

 


 

 


Total operating expenses

    5,510       6,535       9,425       7,755       5,872       6,805       10,250       10,909     6,364       10,024     14,893  
   


 


 


 


 


 


 


 

 


 

 


Operating income (loss) from continuing operations

    (2,790 )     (655 )     1,265       2,872       (2,154 )     (180 )     2,560       4,626     (749 )     144     4,002  

Minority interest in loss of consolidated subsidiary

    —         —         —         —         —         —         —         —       —         —       —    

Other income (expense), net

    172       —         (139 )     (390 )     (184 )     (188 )     (50 )     239     12       26     148  
   


 


 


 


 


 


 


 

 


 

 


Income (loss) from continuing operations before income tax

    (2,618 )     (655 )     1,126       2,482       (2,338 )     (368 )     2,510       4,865     (737 )     170     4,150  

Income tax provision (benefit)

    —         —         —         —         —         —         —         337     —         —       (11,768 )
   


 


 


 


 


 


 


 

 


 

 


Income (loss) from continuing operations

    (2,618 )     (655 )     1,126       2,482       (2,338 )     (368 )     2,510       4,528     (737 )     170     15,918  

Loss from discontinued operations

    (388 )     (63 )     —         (192 )     —         —         —         —       —         —       —    
   


 


 


 


 


 


 


 

 


 

 


Net income (loss)

    (3,006 )     (718 )     1,126       2,290       (2,338 )     (368 )     2,510       4,528     (737 )     170     15,918  

Preferred stock dividend

    —         —         —         —         —         —         —         —       (1,500 )     —       —    
   


 


 


 


 


 


 


 

 


 

 


Net income (loss) attributable to common stockholders

  $ (3,006 )   $ (718 )   $ 1,126     $ 2,290     $ (2,338 )   $ (368 )   $ 2,510     $ 4,528   $ (2,237 )   $ 170   $ 15,918  
   


 


 


 


 


 


 


 

 


 

 


Income (loss) per share from continuing operations:

                                                                                   

Basic

  $ (0.49 )   $ (0.13 )   $ 0.20     $ 0.44     $ (0.40 )   $ (0.06 )   $ 0.44     $ 0.79   $ (0.13 )   $ 0.03   $ 1.40  

Diluted

  $ (0.49 )   $ (0.13 )   $ 0.11     $ 0.25     $ (0.40 )   $ (0.06 )   $ 0.22     $ 0.40   $ (0.13 )   $ 0.01   $ 1.14  

Loss per share from discontinued operations:

                                                                                   

Basic

  $ (0.07 )   $ (0.01 )   $ —       $ (0.03 )   $ —       $ —       $ —       $ —     $ —       $ —     $ —    

Diluted

  $ (0.07 )   $ (0.01 )   $ —       $ (0.03 )   $ —       $ —       $ —       $ —     $ —       $ —     $ —    

Net income (loss) per common share:

                                                                                   

Basic

  $ (0.56 )   $ (0.14 )   $ 0.20     $ 0.41     $ (0.40 )   $ (0.06 )   $ 0.44     $ 0.79   $ (0.39 )   $ 0.03   $ 1.40  

Diluted

  $ (0.56 )   $ (0.14 )   $ 0.11     $ 0.23     $ (0.40 )   $ (0.06 )   $ 0.22     $ 0.40   $ (0.39 )   $ 0.01   $ 1.14  

Weighted average common shares outstanding:

                                                                                   

Basic

    5,360,826       5,400,728       5,564,300       5,635,185       5,846,342       5,691,266       5,718,778       5,729,091     5,801,412       6,738,803     11,400,147  
   


 


 


 


 


 


 


 

 


 

 


Diluted

    5,360,826       5,400,728       10,224,583       9,954,561       5,846,342       5,691,266       11,321,585       11,408,123     5,801,412       11,365,470     13,918,972  
   


 


 


 


 


 


 


 

 


 

 


 

45


Table of Contents
    Quarter Ended

 
    Sept. 30,
2001


    Dec. 31,
2001


    March 31,
2002


    June 30,
2002


    Sept. 30,
2002


    Dec. 31,
2002


    March 31,
2003


    June 30,
2003


    Sept. 30,
2003


    Dec. 31,
2003


    March 31,
2004


 
Consolidated Statement of Operations Data:                                                                  

Net sales

  100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Cost of sales

  59.4     57.4     57.3     57.0     60.2     59.5     55.5     54.6     56.6     56.3     53.6  
   

 

 

 

 

 

 

 

 

 

 

Gross profit

  40.6     42.6     42.7     43.0     39.8     40.5     44.5     45.4     43.4     43.7     46.4  
   

 

 

 

 

 

 

 

 

 

 

Operating expenses:

                                                                 

Selling and marketing

  31.4     23.3     21.1     18.0     25.1     22.5     21.3     19.0     21.5     22.8     21.7  

General and administrative

  32.3     16.7     11.9     9.1     25.4     14.8     10.9     9.6     19.9     13.5     10.9  

Information technology systems

  15.9     6.4     4.3     3.8     10.9     3.7     3.2     3.0     6.3     4.4     2.6  

Stock-based compensation

  2.6     0.9     0.4     0.4     1.4     0.7     0.2     0.3     1.5     2.4     1.4  
   

 

 

 

 

 

 

 

 

 

 

Total operating expenses

  82.2     47.3     37.7     31.3     62.8     41.7     35.6     31.9     49.2     43.1     36.6  
   

 

 

 

 

 

 

 

 

 

 

Operating income (loss) from continuing operations

  (41.6 )   (4.7 )   5.0     11.7     (23.0 )   (1.2 )   8.9     13.5     (5.8 )   0.6     9.8  

Minority interest in loss of consolidated subsidiary

  —       —       —       —       —       —       —       —       —       —       —    

Other income (expense), net

  2.6     —       (0.5 )   (1.6 )   (2.0 )   (1.1 )   (0.2 )   0.7     0.1     0.1     0.4  
   

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income tax

  (39.0 )   (4.7 )   4.5     10.1     (25.0 )   (2.3 )   8.7     14.2     (5.7 )   0.7     10.2  

Income tax provision (benefit)

  —       —       —       —       —       —       —       1.0     —       —       (28.9 )
   

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

  (39.0 )   (4.7 )   4.5     10.1     (25.0 )   (2.3 )   8.7     13.2     (5.7 )   0.7     39.1  

Loss from discontinued operations

  (5.8 )   (0.5 )   —       (0.8 )   —       —       —       —       —       —       —    
   

 

 

 

 

 

 

 

 

 

 

Net income (loss)

  (44.8 )%   (5.2 )%   4.5 %   9.3 %   (25.0 )%   (2.3 )%   8.7 %   13.2 %   (5.7 )%   0.7 %   39.1 %
   

 

 

 

 

 

 

 

 

 

 

 

Net sales for the quarters presented above were impacted by the seasonality factors noted above and have generally increased each quarter compared to the previous year as a result of continuing growth in our net sales.

 

During the current fiscal year, we expect to devote sales and marketing resources to support our existing brands and launch our planned new brands. As a result, we expect total operating expenses to increase in absolute dollars in future periods. However, depending on the level of net sales achieved, we expect total operating expenses to decrease in general as a percentage of net sales. During the next fiscal year, we expect cost of goods sold to represent a similar percentage of net sales to fiscal 2003 and fiscal 2002. In one or more future quarters, our operating results may fall below the expectations of securities analysts and investors, which may cause the trading price of our common stock to decline.

 

Quantitative and Qualitative Disclosure About Market Risk

 

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At March 31, 2004, we did not have any balances outstanding under our bank line of credit arrangement (which we terminated in October 2003); however, the amount of outstanding debt at any time may fluctuate and

 

46


Table of Contents

we may from time to time be subject to refinancing risk. We do not believe that a change of 100 basis points in interest rates would have a material effect on our results of operations or financial condition. We derive substantially all of our revenues from sales within the U.S. We have business relationships with foreign growers and other vendors. Approximately $118,000 or 49.3% of total payments to these foreign growers and vendors for the nine months ended March 31, 2004 was made in U.S. dollars. Although transactions in foreign currencies represent approximately 50.7% of total payments to foreign vendors, the amount is less than 1% of total payments to all vendors and suppliers. Since transactions in foreign currencies are immaterial to us as a whole, we do not consider it necessary to hedge against currency risk.

 

We also maintain insurance policies with cash surrender values in order to fund possible pay-outs under our supplemental executive retirement plan and deferred compensation plan. If the cash surrender value does not grow as fast as the liabilities under these policies due to market conditions, we may face increased financial risk over time.

 

Recently Issued Accounting Standards

 

Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, was issued in January 2003, and a revised interpretation of FIN 46 (FIN 46-R) was issued in December 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Our adoption of FIN 46 and related guidance did not have a material effect on our financial statements.

 

In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. The standard requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The statement provides for expanded pension disclosures regarding the components of plan assets by category, such as equity, debt and real estate. A description of investment policies and strategies and target allocation percentages, or target ranges, for these asset categories also are required in financial statements. Cash flows disclosures will include projections of future benefit payments and an estimate of contributions to be made in the next year to fund pension and other postretirement benefit plans. In addition to expanded annual disclosures, companies are required to report the various elements of pension and other postretirement benefit costs on a quarterly basis. The statement is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, 2003, which for us will be the quarter ended March 31, 2004. Because the revisions to the standard only relate to new disclosures, they had no impact on our financial position or results of operations.

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, estimates are evaluated, including those related to the timing of marketing expense, lives and depreciation of fixed assets, reserves for bad debts and credit card chargebacks, reserves for inventory and impairment of long-lived assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

47


Table of Contents

We apply the following critical accounting policies in the preparation of our consolidated financial statements:

 

    Revenue Recognition.    Our revenues are derived principally from the sale of flowers and plants from our branded www.proflowers.com website. Revenues are recognized upon shipment of the customer orders. Revenues consist of the sales price for the items sold, plus shipping costs upon shipment of customer orders net of estimated refunds. Cash received in advance of revenue recognition is included in deferred revenue.

 

We also recognize revenue from our co-branded and private label websites. With respect to these revenues, we review the criteria set forth in Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, to determine whether to record them in the gross amount of product sales and related costs or the net amount earned as fees under the arrangements. In general, when several of the following are present, we record revenue in gross: we are the primary obligor in a transaction, subject to inventory risk, and have latitude in establishing prices and selecting suppliers. If several of the preceding factors are not present, revenues are based on a fixed percentage, fixed payment schedule or combination of the two.

 

    Reserve For Refunds and Chargebacks.    We reserve for estimated future refunds and credit card chargebacks at the time of shipment based upon historical data. We adjust such reserves as considered necessary. We make judgments as to our ability to collect outstanding receivables and for anticipated credit card chargebacks and provide allowances for anticipated bad debts and chargebacks. Provisions are made based upon a review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. In determining the provision for invoices not specifically reviewed, we analyze historical collection experience, customer credit-worthiness and current economic trends. In determining the provision for credit card chargebacks, we consider the historical chargeback rate. If the historical data used to calculate these allowances does not reflect our future ability to collect outstanding receivables or if the future credit card chargeback rate increases, an increase in the reserve for refunds and chargebacks accounts may be required.

 

    Inventories.    Inventories consist primarily of hard inventory items such as boxes and shipping supplies, vases, chocolates and other accessories. Inventory items are carried on the books at cost. Periodic physical counts of inventory items are conducted to help verify the balance of inventory. A reserve is maintained for obsolete inventory.

 

    Supplemental Executive Retirement Plan.    We adopted the supplemental executive retirement plan during November 2003. The supplemental executive retirement plan is an unfunded defined benefit pension plan for the benefit of certain of our management and highly compensated employees. Benefits are based on formulas that reflect the employees’ years of service and compensation during their employment period. We recognized pension expense of $68,000 during the nine months ended March 31, 2004. The pension expense we recognized is determined using certain assumptions, including the discount rate and the rate of compensation increases. The determination of these assumptions is discussed in more detail below.

 

    We used a discount rate of 7.0% to compute the pension expense for the nine months ended March 31, 2004. The discount rate was determined by comparison against 10 year corporate bond rates.

 

    We used an estimated rate of future compensation increases of 4.0% to compute pension expense for the nine months ended March 31, 2004.

 

    Income Taxes.    Significant judgment is required in determining our provision for income taxes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in our expected realization of these assets depends on future taxable income, our ability to deduct tax loss carryforwards against future taxable income and the effectiveness of our tax planning.

 

48


Table of Contents
    Impairment of Long-lived Assets.    We periodically assess potential impairments of our long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered by us include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business and significant negative industry or economic trends. When we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, we recognize an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair market value if available, or discounted cash flows, if not.

 

    Capitalization of Internally Developed Software Costs.    We capitalize the labor and outside consulting costs associated with development of software for internal use during the application and the development stages. These software development costs are accounted for in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the related software applications of up to three years and are included in depreciation and amortization. During the nine months ended March 31, 2004 and 2003 and the years ended June 30, 2003, 2002 and 2001, we capitalized $662,000, $665,000, $710,000, $403,000 and $0 in software development costs, respectively.

 

    Commitments and Contingencies.    We evaluate contingent liabilities including threatened or pending litigation in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, and record accruals when the outcome of these matters is deemed probable and the liability is reasonably estimable. We make these assessments based on the facts and circumstances and in some instances based in part on the advice of outside legal counsel.

 

    Stock-based Compensation.    Prior to July 1, 2002, we accounted for our employee compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. In accordance with APB 25, stock compensation expense is recorded if, on the date of grant, the current market value of the underlying stock exceeds the exercise price. The expense associated with stock compensation is being amortized over the vesting period of the individual award using an accelerated method of amortization consistent with the method described in FASB Interpretation No. 28.

 

Effective July 1, 2002, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation. We selected the prospective method, which is one of the three transition methods allowed by SFAS No. 148, Accounting for Stock-based Compensation—Transition and Disclosure, to transition to the fair value method of measuring stock-based compensation expense. Under the prospective method, we expensed only those employee stock options that were granted or modified after July 1, 2002. The majority of awards under our plans vest over a period of four years.

 

    Selling and Marketing Expense.    Selling and marketing expenses consist primarily of advertising costs, wages and related payroll expenses, affiliate fees and commissions, focus groups and other research and marketing expenses. Advertising costs are generally expensed as incurred except when advance payments are required. For advertising contracts which cover an extended period of time, the costs are expensed over the life of the contract based on the specifics of the contract. Accruals for advertising costs are recorded based on management’s best estimate of the expenditures incurred. Advertising expenses include Internet, radio, print and television advertising costs.

 

49


Table of Contents

BUSINESS

 

Overview

 

We operate an e-commerce marketplace of websites for perishable goods that consistently delivers fresh, high-quality products direct from the supplier to the customer at competitive prices. We combine an online storefront, proprietary supply chain management technology, established supplier relationships and an integrated logistical relationship with FedEx to create a market platform that bypasses traditional supply chains of wholesalers, distributors and retailers. The benefits to our customers include freshness, quality, price and selection, all with a guaranteed delivery date. The benefits to our suppliers include enhanced margins, broader customer reach and better inventory management. We believe our business model is highly scalable with low capital investment requirements and minimal inventory carrying costs.

 

We believe our business model is well suited for several categories of perishable goods. Since the launch of our business in 1998, we have executed our business model in the U.S. retail floral market through our Proflowers brand. Through www.proflowers.com, we guarantee our customers shipments of high-quality, fresh-cut flowers sourced from one of our domestic or international growers. Our flowers consistently reach customers on the requested delivery date and are generally seven or more days fresher than flowers delivered via the traditional floral supply chain. We have selected a global network of growers and suppliers, which have adopted our proprietary technology to provide us with high-quality flowers, plants and other gift items. We believe this network, our proprietary technology and our integrated relationship with FedEx provide us with competitive advantages in the online floral market. Our price points start at $29.99, and in most instances are significantly lower than other online floral merchants for comparable items, yet we believe we offer a higher quality and fresher product at higher margins.

 

We derive our revenues primarily from the sale of flowers on our proflowers.com website. For the nine months ended March 31, 2004, we reported net sales of $76.9 million, an increase of 41.3% from the nine months ended March 31, 2003, and net income of $15.4 million as compared to a net loss of ($0.2) million in the same period of the prior year. For the fiscal year ended June 30, 2003, we reported net sales of $88.7 million, an increase of 26.2% from the prior year, and net income of $4.3 million. Since our inception, we have incurred significant losses. As of March 31, 2004, we have an accumulated deficit of $35.1 million. Our database of customers has grown from approximately 69,000 as of June 30, 1999 to approximately 2.7 million as of March 31, 2004. In the nine months ended March 31, 2004, 54.3% of our total orders placed came from repeat customers. In the fiscal year ended June 30, 2003, 53.1% of our total orders placed came from repeat customers.

 

We believe our platform can be tailored for use by any business desiring to offer high-quality, time-sensitive or perishable products to its customers. We pursue relationships with other retailers and lifestyle brands on a co-branded or private label basis. We have already entered into multi-year agreements with two Fortune 100 retailers and a company that creates content and domestic merchandise for homemakers and other consumers to use our market platform to sell products under their brand names. Under these arrangements, we design and host a dedicated website for selling perishable goods, handling all order processing and fulfillment and providing customer service. We are not dependent on these arrangements and they represent an immaterial percentage of our net sales in fiscal 2003 and for the nine months ended March 31, 2004.

 

We view the Internet as both an efficient direct marketing tool and a superior enabling technology for redefining the relationship between customers and suppliers across multiple categories of time-sensitive or perishable products. In evaluating categories, we consider our market platform’s ability to streamline the traditional supply chain for the benefit of the customer. We also consider the opportunity for suppliers to transition from a commodity producer to a value-added contributor to the supply chain. We have identified other product categories that fit these criteria. In October 2003, we launched and are now operating two additional websites, Uptown Prime, offering premium meats and now premium seafood, and Cherry Moon Farms, offering fresh premium fruits. In addition, in March 2004, we began testing a premium seafood merchandising extension within Uptown Prime, called Uptown Catch.

 

50


Table of Contents

Industry Overview

 

Growth of Internet and Online Commerce

 

The increasing pervasiveness of the Internet is driving growth in online shopping and changing the manner in which companies merchandise and distribute products. An Internet commerce market model report published in March 2004 by International Data Corporation, a global market intelligence and advisory firm for the information technology and telecommunications industries, estimates that there were approximately 163.4 million Internet users in the U.S. in 2002. International Data Corporation expects that number to grow on average 7.8% annually reaching 237.8 million in 2007. International Data Corporation also estimates that the number of Internet users purchasing products online from home will grow on average 11.4% annually from 80.3 million in 2002 to 137.6 million by 2007. A May 2003 industry outlook report released by IBISWorld, formerly International Business Information Systems, a strategic business information and industry research provider, estimates that revenue through electronic shopping and mail-order houses in the U.S. will grow on average 6.3% annually, increasing from $110.3 billion in 2002 to $149.7 billion by 2007.

 

The growing adoption of the Internet for consumer purchases is driven by heightened awareness and first hand experience regarding the convenience, security and overall usability of Internet shopping. In addition, consumers use the Internet to access products and shopping experiences not previously available through traditional merchandising channels. The combination of increased usage of the Internet by both consumers and retailers has created the opportunity for the formation of new business models that feature streamlined product distribution, alternative merchandising processes, better pricing dynamics and improved customer relationship management.

 

Perishable Goods Market

 

The overall market for perishable goods includes flowers and specialty foods such as high-quality and/or exotic fresh meat, seafood and produce, artisan bread, packaged pasta and canned soups. The Bureau of Economic Analysis, an agency of the U.S. Department of Commerce which collects source data, conducts research and analysis and disseminates statistics to the public, and Packaged Facts, a division of MarketResearch.com and a provider of consumer market research, estimate that in 2002 the floral and specialty foods market was a $24.9 billion market. Traditional merchandising and distribution channels currently dominate these industries with supermarkets and specialty retailers acting as the main consumer access points. Suppliers providing goods through this traditional channel often sell into a series of logistical and distribution intermediaries prior to their product reaching the customer. Many online and direct marketers of perishable goods are primarily brokers which do not exploit the efficiency of the Internet to streamline the traditional channel and redefine the relationship between customers and suppliers.

 

Floral Industry

 

According to a release by the Bureau of Economic Analysis, the U.S. retail market for floriculture was approximately $19.0 billion in 2002 and has grown on average 4.7% annually over the last 10 years. The American Floral Endowment estimates that 3.7% of the total floral sales in 2002 were made online. Although the U.S. is the largest floral market by volume, it ranked 16th in per capita floral consumption during 2002 according to the Flower Council of Holland. We believe this ranking is primarily due to the often poor quality and high prices of flowers delivered through the traditional supply chain.

 

Specialty Foods

 

Packaged Facts estimated that the market for specialty foods represented approximately $5.9 billion in annual sales in 2002 and will grow at least 6.0% annually over the next five years to $7.9 billion. Examples that highlight further growth in the specialty foods category include:

 

    Growth in farmers’ markets.    According to the U.S. Department of Agriculture, the number of farmers’ markets, which allow consumers to purchase fresher goods direct from suppliers, grew from 1,732 in 1994 to more than 3,100 in 2002.

 

51


Table of Contents
    Growth in natural and gourmet grocers.    Two of the largest natural and organic food grocers reported combined revenues totaling $3.8 billion in 2002 and have grown on average 19.1% annually since 1998.

 

    Growth in organic foods.    Datamonitor, a global strategic market analysis company, estimates the U.S. organic foods market to be $10.9 billion in 2002, having grown on average 21.2% annually since 1995, and expects the market to reach $18.0 billion in 2005.

 

The Opportunity

 

Traditional brick and mortar and online retailers typically use a series of intermediaries, such as wholesalers and distributors, to source products. Involving these parties may increase the cost of perishable products and slow the time to market, which can degrade freshness and quality. In addition, distributors and retailers may be limited in their product offering by overhead constraints. As a result, they are more likely to carry a narrow selection of products that have broad appeal and consequently may sell quickly in order to maximize volume and inventory turns. Traditional supply chains for perishable products may not fully use available technology, relationships with suppliers or more efficient distribution methods, and as a result, products typically pass through multiple intermediaries before reaching the customer.

 

In the floral industry, the traditional supply chain typically requires between seven to 12 days for a flower to travel from the grower to the consumer. Generally, once a flower is cut it takes approximately two days to travel from the grower’s facility to an importer or distributor, and then approximately two days to reach a wholesaler where the flower will remain in storage for approximately an additional two to three days before being sent on to a retailer. Once at the retail location, the flower can be stored for approximately two to five days before being sold to the consumer. As a flower travels throughout this process, temperature and humidity often change, which degrade the flower’s appearance and reduce its vase life. With the typical lifespan of a cut flower being less than two weeks, many floral arrangements begin to deteriorate within days of delivery to the consumer.

 

The Provide Commerce Marketplace

 

Our Provide Commerce marketplace is a proven e-commerce platform that consistently delivers fresh, high-quality products direct from the supplier to the customer. We believe that the distribution chain for perishable products, including flowers, premium meat and fresh premium fruit, is particularly well suited for a technologically enhanced and compressed supply chain that more efficiently connects customers with suppliers. By using our market platform, customers receive a higher quality, fresher product at a lower price point, and suppliers receive significant benefits through improved profitability, expanded customer reach and better cost management.

 

LOGO

 

52


Table of Contents

Through our global network of suppliers, we have eliminated multiple intermediaries from the traditional product supply chain, thereby enabling us to purchase products at lower prices and reduce or eliminate many of the typical costs associated with traditional retail businesses including inventory, capital expenditures, labor and administrative expenses. We believe this allows us to achieve higher operating margins than many of our competitors. The nature of our direct from the supplier platform enables us to offer a variety of products with low inventory carrying costs.

 

We initially launched our marketplace in 1998 to sell and deliver flowers, one of the most difficult perishable products to ship. Flowers are extremely fragile and once cut and arranged have a short lifespan and require great care in handling. Flowers are often an emotional purchase with a consumer demanding superior quality and the freshest possible product because quality and sincerity are often intertwined. We designed our technology infrastructure to be highly scalable and adaptable to different categories of time-sensitive shipments, including perishable products. In October 2003, we began deploying our operating infrastructure and using our database of customers for the marketing of premium meats, through the operation of our branded website Uptown Prime, and fresh premium fruits, through the operation of our branded website Cherry Moon Farms. In addition, in March 2004, we began testing a premium seafood merchandising extension within Uptown Prime, called Uptown Catch.

 

Our market platform provides a number of benefits to our customers and suppliers in the floral category. It also benefits retailers who use our platform to sell perishable products to customers under their brand names. We believe these benefits will extend to our existing and new customers as well as new suppliers and partners in both our floral category and in our premium meat and fresh premium fruit categories. These benefits include:

 

Compelling Value for Consumers

 

    Freshness.    Our compressed supply chain allows us to deliver perishable goods quicker than via the traditional supply chain. For instance, our flowers are generally seven or more days fresher than flowers delivered via the traditional supply chain.

 

    Quality.    Our quality assurance programs constantly monitor and test our suppliers to ensure that our customers receive only superior quality products.

 

    Price.    Our business model eliminates multiple intermediaries, reducing the cost to the consumer for a comparable product.

 

    Selection.    Our global network of domestic and foreign suppliers allows us to offer a variety of products, some of which we believe are hard to find through traditional channels.

 

    Guaranteed Delivery Time Window.    Our market platform offers our customers a guaranteed delivery time window and does not allow a customer to request a product or delivery date that is not available. In addition, we employ a proactive, automated communication strategy through which our customers receive confirmatory email updates at the time an order is placed, shipped and delivered.

 

Compelling Benefits for Suppliers

 

    Enhance Profitability.    We provide suppliers with the opportunity to price their products within a streamlined supply chain and earn higher margins by changing their role from a commodity producer to a value-added partner.

 

    Customer Reach.    We offer our suppliers a direct distribution channel via our branded websites through which they can offer their products to an aggregated, geographically distributed audience of consumers.

 

    Quality Assurance.    We work with our suppliers extensively to develop best practices for quality assurance including, in the case of our flower growers, developing specific varieties with breeders that maximize vase life as well as outlining the best inspection, processing and packing procedures.

 

53


Table of Contents
    Inventory and Labor Management.    Our market platform allows suppliers to extend their production cycles around heavy demand periods by enabling shipment within days of a holiday or peak event rather than one to two weeks in advance as is typically required under the traditional supply chain calendar. We also analyze sales data to construct specific forecasts to share with our suppliers.

 

Compelling Advantages to Retailers Using our Market Platform to Sell Perishable Products

 

    Product and Sales Channel Diversification.    Through either a co-branded or private label website, we are able to offer our market platform as a service to other retailers and brands seeking to sell and deliver high-quality perishable products in the same manner that we serve our own customers. In doing so, these retailers create an incremental sales and profit channel that serves their customers’ needs with minimal overhead investment.

 

    Outsources Expertise.    We believe our market platform enables third-party retailers to offer high quality perishable products at a lower price, and faster than could be developed by them internally. This allows these retailers to maintain focused on their core business.

 

    Brand and Customer Base Leverage.    In general, retailers that use our market platform to sell their perishable products have an established customer base, brand name and marketing resources that, when combined with our market platform, can effectively generate demand and increase marketing effectiveness.

 

Business Strategy

 

Provide Commerce’s objective is to become the leading e-commerce marketplace for the delivery of perishable products direct from the supplier to the customer. Our long-term vision is to deploy this market platform across multiple products, brands and retailers. We believe this will result in increased operating leverage by allowing us to use a common customer base, marketing and distribution relationships and infrastructure across the entire marketplace. We plan to attain this goal through the following key strategies:

 

Expand the Provide Commerce Marketplace

 

We intend to leverage our proven market platform, marketing relationships and customer base to increase our floral business and develop additional revenue opportunities beyond the floral category for our own websites and websites that we design and operate for other retailers. We plan to target additional product categories based on our assessment of our market platform’s ability to add value by streamlining the supply chain for the benefit of consumers and suppliers. As in the floral category, we believe both the consumer and the supplier will be better served in the premium meat and fresh premium fruit categories if products are sourced directly from the supplier and delivered to the consumer via our compressed supply chain. In October 2003, we launched and are now operating Uptown Prime, offering premium meats and now premium seafood, and Cherry Moon Farms, offering fresh premium fruits. We plan to investigate and target additional categories in the future.

 

To support the launch of additional categories, we have developed our technology and processes to operate with additional product categories. We have:

 

    engineered our system to support peak loads in excess of 50 times our current average daily volumes; and

 

    already managed peak shipment days of over 184,000 orders.

 

Additionally, over the last two years, Gomez, Inc., an Internet benchmarking and improvement strategies firm which provides rankings of websites, gave our website its best rating, 3 Stars, for both availability and response time. Over the 30 days ended May 31, 2004, our website was ranked by Gomez as being faster 90.5% and more available 95.2% of the time as compared to the benchmark average for the 10 largest e-commerce sites on the Internet.

 

54


Table of Contents

Increase Our Brand Awareness

 

We believe that building greater awareness of our brands within and beyond our existing customer base is important for our continued growth. We intend to promote our Proflowers, Uptown Prime and Cherry Moon Farms brands aggressively through a variety of online and offline marketing and promotional techniques, including Internet, print, radio, email, direct mail, public relations and television. We intend to expand consumer association of our brands with fresh, high-quality perishable products delivered direct from the supplier.

 

Continue to Acquire and Retain Customers

 

We believe our ability to acquire and retain customers effectively is critical to our success. To acquire customers, we rely on a variety of online and offline marketing activities, our growing brand awareness and an easy-to-navigate storefront that allows customers to make purchases quickly. In addition, we constantly modify our website format and redesign our offerings based on customer purchasing patterns.

 

Once a customer has completed an order, we focus on establishing a relationship to encourage repeat purchases. This relationship relies on the customer’s overall satisfaction with the product along with continued contact through email, direct mail or other channels. In the nine months ended March 31, 2004, 54.3% of total orders placed on our website came from repeat customers. In the fiscal year ended June 30, 2003, approximately 53.1% of total orders placed came from repeat customers. We intend to continue to leverage our existing Proflowers customer base of approximately 2.7 million as of March 31, 2004 for the marketing efforts of Uptown Prime and Cherry Moon Farms. In addition, in March 2004, we began testing a premium seafood merchandising extension within Uptown Prime, called Uptown Catch.

 

In addition to the products we offer to individual customers, we also work with a number of corporations to serve their business gifting needs, provide employee discount programs, or assist in the design of gift-with-purchase or related marketing programs. We view these as additional opportunities to acquire customers and orders for our business.

 

Continue to Establish Strong Relationships with High-Quality Suppliers

 

Building strong relationships with quality suppliers is crucial to the success of our market platform. To maintain our standards, we have established a quality assurance program to review and test our suppliers on an ongoing basis. We continue to work with suppliers to explore new methods to preserve quality and freshness, ensure a diverse product offering, maintain our efficient technology and reduce costs. In addition, we will regularly seek out new suppliers to provide the broadest available selection of quality products for the benefit of our customers.

 

Expand Distribution Initiatives

 

We intend to continuously increase the efficiency of our fulfillment and distribution system, including cost- effective alternatives. We maintain a collaborative relationship with FedEx to manage shipments based on our forecasting. We continually evaluate our distribution and delivery methods to improve the cost effectiveness and efficiency, including the introduction of the use of FedEx Ground in early 2004. Our proprietary technology allows us to manage delivery accuracy by selectively routing shipments within the FedEx shipping system and printing packing labels with key information for sorting and tracking. Our integration with FedEx allows us to constantly monitor package status and via email, automatically update our customers with order placement, shipment and delivery information. If we discover a potential problem in transit due to weather, mechanical problems or human error, we are able to either re-ship products from another source to guarantee right-day delivery or proactively contact customers to discuss the situation and find a solution. Our systems are designed to integrate with additional shipping providers if we feel that we will be better served in a particular market or product category by alternate carriers. We maintain a continuous dialogue with all of the available shipping providers to ensure that our shipping needs are met in the most timely and cost effective manner.

 

55


Table of Contents

We have international operations based in the Netherlands through which we are able to deliver flowers in over 43 countries, using our overseas global network of growers and distribution partners. Our overseas business is primarily for the benefit of domestic consumers wishing to ship our products abroad. This business is neither a core focus for management nor a material source of revenues at this time.

 

Grow Our Relationships with Retailers that Use Our Market Platform

 

We intend to grow our existing and new product categories via arrangements with other branded retailers and direct marketers. We offer a variety of arrangements for retailers that want to use our market platform to offer perishable products, including a co-branded website, a private label website or a hybrid of the two. We currently have a private label partnership with a company that creates content and domestic merchandise for homemakers and other consumers to use our market platform to operate its floral website. We also have hybrid arrangements with two Fortune 100 retailers to provide our market platform and products for their online floral meat or fruit businesses.

 

In the floral category, our arrangements are structured to involve a combination of revenue sharing and fee-based agreements. For revenue sharing agreements, we pay the retailer a portion of the revenues generated from its website. Fee-based retailer arrangements involve a combination of up-front development costs and per-transaction fees paid to us by the retailer. In both cases, we host and run the website on behalf of the retailer and provide all order processing, fulfillment and customer service.

 

Our Marketplace Websites

 

Our marketplace is a collection of our own branded websites and websites that we operate for other retailers, each offering high-quality perishable products shipped directly from the supplier to the customer. We believe there are a number of elements that differentiate our customers’ shopping experience and aid in both customer conversion and satisfaction, such as:

 

Real-time Inventory Management.    Only products currently available for shipment are displayed on our branded websites to prevent “out of stock” or back-order scenarios. We actively match supplier inventories with product availability shown on our website to guarantee that our customers receive the exact product they order.

 

Ease of Ordering.    We have designed our branded websites to minimize the time and number of web pages a customer views while searching for an item prior to purchase. Once an item and delivery date are chosen, relevant cross-sell and up-sell products are presented during the checkout process.

 

Delivery Date Focus.    Only available delivery dates for each product selected are displayed as choices. The choice of a delivery date initiates our market platform’s selection of the most appropriate supplier and distribution route.

 

Reverse Presentation of Customer and Recipient Information.    In contrast to many e-commerce websites, our branded websites are built specifically around the way people shop for gifts and perishable deliveries. For instance, following selection of the product we ask the customer for the recipient’s information prior to asking for the customer’s billing information. Along with recipient information, we present our customers with a large personalized card message field consisting of five lines with 40 characters per line.

 

Transaction Execution.    Our order process provides a variety of features to speed transaction processing and help prevent fraud and customer data input errors. These features include:

 

    an efficiently designed, intuitive interface;

 

    a real-time postal address validator to help our customers enter correct postal addresses, suggesting alternatives in the event of an error; and

 

56


Table of Contents
    an online credit card authorization service to help our customers avoid typographic errors.

 

Three Confirmation Emails.    Three emails are automatically generated and sent in connection with the fulfillment of every order. The first confirms the order details for the customer. The second is sent at the time of shipment to verify that the item is in transit to its specified destination. The third email is sent at the time of delivery and verifies the receipt of the package and signature of the recipient, if applicable.

 

Additional Services.    Additional services that are available on our websites include reminder services for important dates, detailed product information, the ability to shop by occasion, flower or gift type, and links to online or phone-based customer service.

 

Quality Assurance

 

We have developed strict quality assurance procedures in our flower business which we believe we can apply to other perishable products. In the floral category, we work closely with our global network of growers and distribution facilities to ensure that our specific quality assurance standards are implemented at cultivation, harvesting, packing, inspection and transportation. Before a supplier can join our network, they must undergo thorough testing and evaluation. Once part of our network, we work closely with our suppliers to grow and harvest the highest quality flowers. We engage in systematic inspections throughout the year to ensure compliance with our quality standards. We also research flower varieties and determine the optimal harvest times to ensure that the blooms will fully open and last seven to 10 days.

 

Once harvested, the flowers are placed in hydration solutions at the greenhouse and then transported to a refrigerated area, usually within 15 minutes. Next, the flowers are sorted and inspected for quality. We monitor both humidity levels and temperature, which is maintained between 34 and 36 degrees for as long as possible to reduce respiration and increase vase life.

 

The packing methodologies employed in the shipment of our flowers further maintain quality. Prior to sealing the box within a refrigerated packing area, an inspector ensures that each bouquet is properly secured, contains a message card, care and handling instructions, flower food and the appropriate accessory, if applicable. Finished boxes are placed on pallets and relocated to a storage cooler usually within 15 minutes.

 

In addition to providing each individual grower and distribution facility with a manual outlining our protocols and procedures, each site has quality assurance personnel to implement and manage the same procedures. During the peak shipping periods, our inspectors are dispatched to the various growers and distribution facilities to assist with the inspection of the large volume of flowers.

 

Our quality initiatives are supported by detailed product tracking which allows our customer service department to trace any issue resulting in customer dissatisfaction back to the grower, SKU and time of shipment for correction of the root cause. When a customer calls with a quality complaint, corrective action is taken and reports are cycled back to the growers and distribution facility to ensure that our quality commitment is constantly monitored.

 

We are initiating similarly strict quality assurance standards in conjunction with the launch of additional product categories.

 

Marketing and Promotions

 

Important drivers of our business are the ability to attract visitors to our branded websites, convert them into purchasing customers and establish a relationship in which they become repeat customers. Our marketing efforts focus on a variety of selective advertising techniques including online and offline marketing and promotional channels, such as Internet, print, radio, email, direct mail, public relations and television. We run cross-marketing

 

57


Table of Contents

or promotional campaigns which increase overall traffic and customer conversion rates. We also regularly review the effectiveness of our marketing programs.

 

Our strategy to convert visitors into purchasing customers includes the combination of easy-to-navigate websites, low price points and constant product updating. Customers can search through a variety of categories, making their purchases simple yet customized to a specific need. We also focus on constantly updating our website, allowing us to position higher selling products more prominently and remove less popular items on a real-time basis.

 

In the floral category, we focus on establishing and maintaining our relationship through marketing campaigns centered on key holidays and personalized occasions such as anniversaries or birthdays. Accordingly, we will contact a customer through email or direct mail in advance of the occasion. Customers who receive an email advertisement are able to link directly to a variety of products, allowing a quick and easy purchase.

 

Products

 

Floral

 

Through our Proflowers website, and the websites that we design and operate for other retailers, we currently offer a variety of fresh-cut flowers, plants and gift items. In addition to our core products, we are constantly working with our growers and suppliers to offer new products. We provide flowers for everyday use and for specific occasions such as Mother’s Day, Valentine’s Day, birthdays, Thanksgiving and Christmas. Each year, we design new products for these occasions and eliminate the lowest performing products from the prior year. As of March 31, 2004, we offered over 200 SKUs representing roses, other flowers and potted plants. In addition, we also provide our customers with gift add-ons or alternatives to their floral arrangements, including plush toys, wreaths, gift baskets, chocolates, gourmet desserts and popcorn. These non-floral products represented approximately 6% of net sales in fiscal 2003 and approximately 7.8% for the first nine months of fiscal 2004.

 

Other Perishables

 

We launched our Uptown Prime and Cherry Moon Farms websites in October 2003 and are now operating these branded websites using our existing technology, systems and expertise. On our new branded websites, we offer an assortment of premium products in each category intended for gift-giving or personal consumption. Through our Uptown Prime website, we offer premium meats in various cuts, such as Kobe beef and Premium Angus, and through our Cherry Moon Farms website, we feature an assortment of farm fresh, premium fruits. In addition, in March 2004, we began testing a premium seafood merchandising extension within Uptown Prime, called Uptown Catch. We believe the growth and profitability opportunities in these new categories and brand extensions are similar to the growth and profitability we have experienced in the floral category.

 

Distribution Facilities

 

In order to assist our planning and logistics capabilities, depending upon the time of year, we use between five and 10 distribution facilities located strategically across the U.S. based on proximity to population centers and distribution hubs to supplement our 10 to 20 suppliers that also offer drop-shipment distribution capabilities on their own. As of May 31, 2004, our distribution facilities are located in the Northeast, Florida, Indiana, Texas, California and Mississippi. With the sole exception of our Miami, Florida, facility, these facilities are operated by third-parties that deal in the distribution of perishable products for a number of companies and that receive a per-order transaction fee for assisting in processing and packing our products. By distributing products through these distribution facilities, we maximize on-time delivery especially during peak shipment dates, distribute products in a more cost-effective manner and minimize the capacity constraints that may exist at an individual supplier location.

 

58


Table of Contents

Customer Service

 

We believe that our ability to establish and maintain long-term relationships with our customers and encourage repeat visits and purchases is due, in part, to the strength of our customer support and service operations. We operate an in-house customer service center at our headquarters with 36 full-time and 68 part-time and seasonal customer service representatives as of May 31, 2004. Our customer service representatives are empowered to meet our customers’ needs through phone, principally through the number 888-FRESHEST, or email 24-hours a day, seven days a week. During holidays and peak periods, our customer service center can scale to over 250 representatives through a combination of in-house and outsourced staff.

 

Our team of customer support and service personnel is responsible for assisting with phone orders, handling general customer inquiries, answering customer questions via phone and email about the ordering process and investigating the status of orders or shipments. Our representatives are also trained to document and code each problem allowing us to work directly with a specific supplier to identify the root cause of the problem and improve the overall quality of our products. Once an order has been completed, we follow-up with a personalized email encouraging customers to contact us with feedback. In the floral category, as part of our seven-day freshness guarantee, if our customers are not entirely satisfied with their order they can receive a replacement bouquet or refund. We contact both customers and recipients in order to measure customer satisfaction.

 

Our customer service department also works proactively to prevent issues before they occur. Our technology constantly tracks packages and if a shipment is delayed prior to FedEx departure, we will authorize a duplicate shipment to be sent out immediately to ensure our products reach the intended recipient as expected. If the problem occurs after the FedEx departure time, we will call or email the customer informing them of the situation and provide the customer with various options or replace the package that will not arrive. We believe that this proactive model of customer service defeats customer dissatisfaction before it occurs.

 

Our customer service and overall customer satisfaction has been rated as the highest in the online floral industry. In May 2004, Bizrate, a leading online research provider which also operates a shopping search engine that produces relevant search results by weighing price, popularity and availability of products against the reputations of merchants that sell them as rated independently by customers, recognized us for our overall customer satisfaction ranking higher than the average for the custom gifts and flowers category in a number of categories, including overall satisfaction and repurchase intent.

 

Technology and Systems

 

We believe our technology capabilities substantially differentiate us from our competitors. We internally developed and built a reliable, scalable, flexible and secure infrastructure using Microsoft.NET and JAVA (J2EE) technologies. The features and functionality of the six primary systems that make up our infrastructure (commerce, supply chain, customer relationship, transaction processing, data warehouse/reporting and user interface) have been created in direct response to the needs of customers, suppliers, retailers that use our market platform to sell perishable products, and employees.

 

Specifically, our infrastructure is designed to provide an e-commerce marketplace for the buyers and sellers of time-sensitive perishable products. Our technology accepts and validates customer orders, places and manages orders with suppliers, routes packages to the appropriate destination via FedEx, tracks the order and emails the customer automatically at order, shipping and delivery. We believe that we can easily customize our technology infrastructure to fulfill the branding and business needs of retailers that use our market platform to sell perishable products, and provide all the real-time and historical information needed to manage operational decisions and inform business analysis.

 

Our infrastructure consists of loosely coupled systems, web services and websites that use XML as the language for process integration across our internal systems and the external systems of retailers that use our market platform to sell perishable products. We believe this modular, highly scalable and customizable system

 

59


Table of Contents

make it possible to efficiently expand for the future needs of additional partners, customers and suppliers. Our transaction processing system has been designed to support over 336,000 orders in a single day which is over 45 times the projected average order day. Our technology today maintains data records for over 2.2 million registered customers with disk capacity to maintain records for over 20 million.

 

We engineered our systems and infrastructure to meet or exceed industry architecture standards. We built our systems to reduce the downtime in the event of system failures or catastrophic occurrences. Our websites are available 24 hours a day, seven days a week with minimal downtime required for maintenance. The hardware that supports our systems is hosted at the Level 3 Communications facility in San Diego, California. AT&T and SBC Communications provide the data and voice communication services for our infrastructure. All of our systems are double, and in many cases triple, redundant and have emergency power backup including full emergency backup capability at our headquarters in San Diego, California. We currently store our data on Microsoft Enterprise SQL Server 2000 databases running on a cluster of IBM servers and an IBM Storage Area Network. Our infrastructure uses a Compaq/Veritas system for off line tape backup and information storage. Our infrastructure’s web and application server farms consist of numerous load balanced IBM and Compaq servers running Microsoft’s Windows 2000, Microsoft’s Windows 2003 and Red Hat’s Linux operating systems and our web servers use Verisign’s digital certificates to conduct secure communications and transactions. We use Foundry Network’s load balancing systems, CISCO’s routers and switches, Nokia/Checkpoint firewalls and the open source Snort intrusion detection system. We monitor our infrastructure internally using Microsoft’s Operations Manager, and Mercury Interactive’s Site Scope systems. Our websites are monitored externally by Gomez Inc. from dozens of sites located around the world.

 

As of May 31, 2004, we employed a total of 34 full-time personnel in the architecture, software engineering, quality assurance, infrastructure and operations, program management and information technology administration groups. In addition, as of May 31, 2004, we employed four part-time interns in our operations center to provide us night, weekend and holiday coverage.

 

Supplier Systems and Services

 

We believe our supplier systems and services are an important part of our technology infrastructure. When a new supplier joins our network, we begin by providing the supplier with a low-cost system consisting of a computer server and two or more high-speed label printers depending on the particular supplier’s order volume. Along with this system, we provide detailed training manuals and on-site training for use of the system. At peak periods, we send a member of our corporate team to manage and assist the supplier in fulfilling the orders at the quality level guaranteed to our customers.

 

Our supplier system is redundant for power, connectivity and other features. After an order is placed, our technology immediately directs the order to the appropriate supplier. At the supplier’s facility, a packing label will print that includes a packing slip, customer generated gift message and detailed FedEx label. The supplier will then package orders in our branded packaging materials or prepare individual products for bulk shipment. The package is then picked up by FedEx, scanned, and an email notification is sent to notify the customer that the order is in route.

 

Competition

 

The retail and online commerce market is rapidly evolving and intensely competitive. In particular, the floral, premium meat and fresh premium fruit categories are well represented through traditional channels as well as online. Our competitors can be divided into several groups, many of which use traditional supply chains to source and deliver their products. The products we offer can be purchased at supermarkets and warehouse stores as well as at specialty markets. Our floral competitors include traditional florists, catalog and online floral providers and floral wire services such as FTD, 1-800-FLOWERS and Teleflora. In the premium meat category, we believe our competitors include specialty butchers, mail order companies and other online premium meat

 

60


Table of Contents

providers, such as Omaha Steaks Company. We believe our competitors in the fresh premium fruit category include local farmers’ markets and specialty catalog companies, such as Harry & David. Additionally, we compete with specialty food companies and general gift companies.

 

We believe that the principal competitive factors in our chosen markets are high-quality products, freshness, brand recognition, selection, convenience, price, website performance, customer service and accuracy of order shipment.

 

Many of our current and potential traditional store-based and online competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Many of these current and potential competitors can devote substantially more resources to their website and systems development than we can. In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with online competitors or floral retailers as the use of the Internet and other online services increases.

 

Intellectual Property/Proprietary Rights

 

We use a combination of trademark, copyright and trade secret laws, including confidentiality agreements, to protect our proprietary intellectual property. We own trademark registrations for Proflowers in the U.S. and in Australia, Canada, the European Union, Japan, Mexico, New Zealand and Switzerland, and for Freshness Factor and a flower logo in the U.S. We have filed patent applications for three inventions and trademark applications for the marks Provide Commerce, Uptown Prime, Uptown Catch and Cherry Moon Farms. Our outstanding patent and trademark applications may not be allowed. Even if these applications are allowed, they may not provide us a competitive advantage. Competitors may challenge successfully the validity and scope of our existing and expected trademarks and, if issued, our patents. In addition to a trademark registration, we also have a copyright registration with respect to our flower logo.

 

To date, we have relied primarily on proprietary processes and know-how to protect our intellectual property related to our website and fulfillment processes. Our proprietary processes and know-how are the systems we have developed for our customers to enable them to efficiently order our products at a lower cost to them and expense to us. Our patents, if issued, will not cover processes and know-how.

 

From time to time, we may encounter disputes over rights and obligations concerning intellectual property. We believe that our service offering does not infringe the intellectual property rights of any third-party. However, we cannot assure you that we will prevail in any intellectual property dispute.

 

Government Regulation

 

We are subject to state, federal and international regulations covering e-commerce. These regulations currently affect our website and our business, including our user privacy policy, product pricing policies, website content, taxes, intellectual property and other property ownership rights. As use of the Internet continues to evolve, we expect that there will be an increasing number of laws and regulations pertaining to the Internet, and that existing laws will be applied to the Internet, in the U.S. and throughout the world. These new laws or regulations may relate to liability for information received from or transmitted over the Internet and quality of products and services sold over the Internet. These new laws or regulations may also amend existing laws governing taxes, intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues.

 

Further, the growth and development of online commerce may prompt calls for more stringent consumer protection laws, both in the U.S. and abroad. Regulations imposed by the Federal Trade Commission, or FTC, may adversely affect the growth of our business or our marketing efforts. The FTC has adopted regulations regarding the collection, maintenance, dissemination and use of personal identifying information obtained from

 

61


Table of Contents

individuals when accessing websites. These regulations include requirements that we establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct and delete personal information stored by us. They also contain specific parental consent provisions with respect to collecting information from children. These regulations also include enforcement and redress provisions. In addition, the FTC has conducted investigations into the privacy practices of companies that collect information on the Internet. We may become subject to the FTC’s regulatory and enforcement efforts with respect to current regulations or future regulations, or those of other governmental bodies, which may adversely affect our ability to collect demographic and personal information from users and our ability to email users, which could adversely affect our marketing efforts. We also may be subject to regulation not specifically related to the Internet, including laws affecting direct marketers and advertisers. The adoption of or modification of laws applicable to Internet advertising, marketing or data collection could affect our ability to market our products, decrease the demand for our products, increase our costs or otherwise adversely affect our business.

 

Our flower offerings, premium meat offerings and fresh premium fruit offerings subject us to various federal, state and local government regulations relating to the sale and handling of crops and food items, including regulations imposed by the United States Food & Drug Administration, or FDA, the United States Department of Labor, Occupational Safety and Health Administration, or OSHA, the United States Department of Agriculture, or USDA, and Animal and Plant Health Inspection Service, or APHIS. We have designed our importation procedures and food handling operations to comply with such regulations. However, FDA, OSHA the USDA, APHIS or another federal, state or local food regulatory authority may require changes to our food sales and handling operations and importation procedures. We may not be able to make the requested governmental changes or obtain any required permits, licenses or approvals in a timely manner, or at all. Failure to make requested changes or to obtain or maintain a required permit, license or approval could cause us to incur substantial compliance costs and delay the availability of, or cancel, certain product offerings. In addition, any inquiry or investigation from a regulatory authority could have a negative impact on our reputation. Any of these events would harm our business and adversely affect our results of operations.

 

Employees

 

As of May 31, 2004, we had 140 full-time employees. Of these full-time employees, eight were in fulfillment operations, 34 were in technology and development, 28 were in marketing, 36 were in customer service, 33 were general or administrative employees and one was an international employee. We utilize part-time and temporary employees to respond to fluctuating seasonal demand around peak holidays periods. We had two part-time employees and 73 temporary employees as of May 31, 2004. Our employees are not covered by a collective bargaining agreement, and we consider our relations with our employees to be good.

 

Legal Proceedings

 

We are not a party to any material legal proceedings that management believes would adversely affect our business. We may, however, become subject to lawsuits in the ordinary course of business.

 

Facilities

 

Our principal executive, administrative, technology, marketing and customer service facilities total approximately 47,700 square feet and are located at 5005 Wateridge Vista Drive in San Diego, California under a lease that expires in August 2009. Our monthly rent for this facility is $63,918 through December 2004, shall be rent-free for the following five months and then shall increase incrementally from $69,217 to $77,810 for the remainder of the term. We also lease an approximately 36,051 square foot office and warehouse facility located at 1351 Northwest 78th Avenue in Miami, Florida, which we utilize primarily as an import and transition point for products from our international suppliers. We pay monthly rent of $31,985 for the lease on that facility which expires in October 2005, with an option to renew for an additional two years.

 

62


Table of Contents

MANAGEMENT

 

Executive Officers, Significant Employees and Directors

 

Set forth below is the name, age, position and a brief account of the business experience of each of our executive officers, significant employees and directors as of May 31, 2004.

 

Name


   Age

  

Position(s)


William Strauss (1)

   46    Chief Executive Officer and Assistant Secretary, Director

Abraham Wynperle

   48    President and Chief Operating Officer

Kevin Hall

   49    Chief Information Officer

Blake T. Bilstad

   34    Senior Vice President, General Counsel and Secretary

Kenneth Constable

   53    Senior Vice President and General Manager

Jonathan Sills

   30    Senior Vice President, Strategy and Corporate Development

Rex Bosen

   45    Vice President, Finance and Accounting and Corporate Treasurer

Penny Handscomb

   38    Vice President, Human Resources and Training

Mark Irace

   35    Vice President, Acquisition Marketing

Mark Sottosanti

   32    Vice President, Planning and Logistics

Kimberly Yin

   39    Vice President, Marketing and Merchandising

Joel Tomas Citron (1)

   42    Chairman of the Board of Directors

David E. R. Dangoor (2)(3)(4)

   55    Director

Joseph P. Kennedy (4)

   51    Director

Arthur B. Laffer, Ph.D. (1)

   63    Director

Peter J. McLaughlin (2)(3)

   65    Director

James M. Myers (2)

   46    Director

Jordanna Schutz

   23    Director

(1)   Member of the Executive Committee
(2)   Member of the Audit and Corporate Governance Committee
(3)   Member of the Compensation Committee
(4)   Member of the Nominating Committee

 

William Strauss joined us in April 1998 as president and chief operating officer. Mr. Strauss was promoted to chief executive officer in November 1999 and was elected a member of our board of directors in December 1998. In October 2001, Mr. Strauss became our assistant secretary. Prior to joining us, Mr. Strauss was part of the senior management team at ChipSoft, Inc., the makers of TurboTax, which was acquired by Intuit, Inc. in 1993. In the early 1990s, Mr. Strauss was vice president of operations for Hanover Direct, a large catalog company. Mr. Strauss holds a B.A. in accounting from Syracuse University.

 

Abraham Wynperle joined us in November 1999 through our merger with Flower Farm Direct, Inc. Mr. Wynperle has more than 20 years of experience in the fresh cut flower industry in the U.S. In May 2000, Mr. Wynperle became our president and chief operating officer and a member of our board of directors, from which he resigned in 2003. Prior to joining us, Mr. Wynperle was founder and chief executive officer of Flower Farm Direct, Inc., a direct-from-the-grower Internet floral retailer from January 1998 to November 1999. Prior to that, Mr. Wynperle was chief executive officer of Sunburst Farms-Floramerica Group, which was sold to Dole Food Company, Inc. in 1997. Mr. Wynperle holds an M.B.A. and a B.B.A. from the University of Puget Sound, Tacoma, Washington.

 

Kevin Hall joined us as chief information officer in August 2001. From September 1995 to January 2001, Mr. Hall served as chief technology and information officer for Amherst Technologies, a computer infrastructure and enterprise technology services company. Mr. Hall received the 2000 Smithsonian Laureate Medal, which is presented to top international information technology executives for visionary use of technology in business and in 1996 won an ENNE award for his work with scalable high transaction client server systems. Mr. Hall holds a

 

63


Table of Contents

B.S. in exercise science, cum laude, from the University of Massachusetts Amherst and has taken advanced coursework toward his M.B.A. in executive management at Loyola College.

 

Blake T. Bilstad joined us as senior vice president, general counsel and secretary in April 2004. Prior to joining us, from November 2001 to April 2004, Mr. Bilstad was with Vivendi Universal Net USA Group, Inc., the U.S. group of internet companies owned by Vivendi Universal S.A., a French-owned entertainment and telecommunications conglomerate, serving most recently as the group’s senior vice president-legal affairs and secretary. From June 1999 to November 2001, Mr. Bilstad was with MP3.com, Inc., an online music company that was acquired by Vivendi Universal in August 2001, and held a variety of legal positions there including vice president-corporate legal affairs, secretary and corporate counsel. From November 1996 to June 1999, Mr. Bilstad was a business associate at the law firm of Cooley Godward LLP. Mr. Bilstad holds a J.D. from Harvard Law School and a B.A. in history from Duke University.

 

Kenneth Constable joined us in September 2003 as senior vice president and general manager. Prior to joining us, Mr. Constable was with Dell Inc. from February 1999 to August 2003, where he served as vice president and general manager of several international divisions in Asia and Canada. From July 1994 to January 1999, Mr. Constable held a variety of senior positions at Nabisco, Inc., including president and chief executive officer of Nabisco Canada. Prior to that, Mr. Constable was at PepsiCo from September 1978 through July 1994 where his senior management roles included regional vice president for Kentucky Fried Chicken Latin America, president of Frito-Lay Puerto Rico, vice president and chief marketing officer of Frito-Lay International, regional general manager of PepsiCo in South Latin America, and director of marketing of PepsiCo Japan. Prior to this global experience, Ken started his career as a brand manager with Procter & Gamble in Canada. Mr. Constable holds an M.B.A. and a B.Sc. in electrical engineering from the University of Alberta.

 

Jonathan Sills joined us as vice president, strategy and product development in May 1999. He became vice president, strategy and general manager, business services in July 2000 and since December 2002 has served as senior vice president, strategy and corporate development. From October 1997 to May 1999, Mr. Sills worked as a management consultant at McKinsey & Company. A Fulbright Scholar, Mr. Sills holds an M.S. with distinction in history of science and technology from Oxford University and a B.S.E. in engineering and management systems, summa cum laude, from Princeton University.

 

Rex Bosen joined us as vice president, finance and accounting in September 2002. Mr. Bosen became our corporate treasurer in October 2002 and served as our secretary from September 2003 through April 2004. Prior to joining us, Mr. Bosen co-founded and served as chief financial officer at PhatPipe, Inc., a start-up company involved with the provision of high speed Internet access and e-commerce from September 1999 through January 2001. From September 1992 through October 1999, Mr. Bosen served as the controller at E/G Electro-graph, Inc., a manufacturing company. From August 1984 to September 1992, Mr. Bosen worked at Price Waterhouse. Mr. Bosen is a director of Lindows, Inc., a Linux desktop software company. Mr. Bosen holds an MACC and B.S. in accounting from Brigham Young University.

 

Penny Handscomb joined us as vice president, human resources and training in May 1999. From June 1998 to May 1999, Ms. Handscomb served as vice president, human resources and training for Composit Communications, a customer interaction solutions company. Ms. Handscomb holds a Certified Human Resources Professional, or CHRP, designation from the Human Resources Association of Ontario, a diploma in management studies from Wilfrid Laurier University, Waterloo, Ontario, and a B.A. in human kinetics from the University of Waterloo.

 

Mark Irace joined us in March 1999 as our director of marketing analysis. In June 2003, he became our vice president, acquisition marketing. Mr. Irace served on the board of directors for the San Diego Direct Marketing Association from June 1995 to July 1998 as vice president of communications and webmaster, and has been the vice president for the San Diego Internet Marketers since June 2002. Mr. Irace holds a B.S. in Marketing from Miami University and is pursuing an M.B.A. with a venture capital emphasis from the University of San Diego.

 

64


Table of Contents

Mark Sottosanti joined us as a senior analyst in October 1999. He became director of strategic research and analysis in March 2000 and since May 2000 has served as vice president, planning and logistics. Prior to joining us, Mr. Sottosanti ran A-V Health Promotions which he founded in June 1993, a business focused on expanding the market penetration of leading edge dental technologies. From 1995 to 1999, Mr. Sottosanti consulted for Lifecore Biomedical, a manufacturer of dental implant systems used in tooth replacement therapy, dental regeneration products, and hyaluronan (hyaluronic acid) products. Mr. Sottosanti holds a B.S. in economics from the Wharton School at the University of Pennsylvania.

 

Kimberly Yin joined us as vice president, marketing and merchandising in October 2002. Prior to joining us, from August 1998 through July 2002, Ms. Yin was a vice president of sales and marketing at Rokenbok Toy Company, a high-tech toy manufacturer, where she was responsible for worldwide marketing and sales strategy. Prior to her work at Rokenbok, Ms. Yin was general manager of Rancho Trade, Inc., a retail and catalog business from June 1996 through August 1998. Ms. Yin holds an M.B.A. from the University of Southern California and a B.S. in marketing from San Jose State University.

 

Joel Tomas Citron has served as a member of our board of directors since May 2000. Mr. Citron has served as chairman of our board of directors since October 2001. From October 2002, Mr. Citron has served as president and chief executive officer of Jovian Holdings, Inc. From 1998 to 2001, Mr. Citron was director, vice chairman, president and chief executive officer of Mastec Inc., a publicly traded end-to-end communications and energy infrastructure service provider. From 1992 to 1998, Mr. Citron was chairman and chief executive officer of Proventus Inc., the U.S. subsidiary of Proventus AB, a large investment holding company. From 1996 to 1998, Mr. Citron was chairman of American Information Systems, Inc., a network implementation and Internet software development company co-founded by Mr. Jared Schutz Polis, our founder. Mr. Citron currently serves as chairman of the board of directors of Oxigene Inc., a publicly traded bio-tech company. Mr. Citron holds an M.A. in Economics and a B.S. in business administration from the University of Southern California.

 

David E.R. Dangoor joined our board of directors in September 2003 and currently serves as the chairman of our compensation committee. Prior to his retirement in August 2002, Mr. Dangoor served as executive vice president for Philip Morris International Inc., a position he held from 1992. He also served in a variety of senior management roles with Philip Morris U.S.A. and Philip Morris International Inc. from 1977 through 1992. He is currently a principal of an international marketing consulting company of which Philip Morris International S.A. is a client. Mr. Dangoor is a member of the board of trustees of the American Scandinavia Foundation, a non-profit organization, a position he has held since March 1996. He is also a director of the board of the Swedish Chamber of Commerce, a non-profit organization, a position he has held since September 1995. He currently serves on the board of directors of BioGaia AB, a Swedish public biotechnology company. Mr. Dangoor holds the equivalent of an M.B.A. from Stockholm School of Economics.

 

Joseph P. Kennedy has served as a member of our board of directors since May 2000 and currently serves as the chairman of our nominating committee. Mr. Kennedy is a former U.S. congressman and House Banking Committee member and Subcommittee chairman. Since January 1998, Mr. Kennedy has served as the chairman and president of Citizens Energy Corporation, a non-profit company supporting a wide array of social and charitable programs in the U.S. and abroad. Mr. Kennedy holds a B.A. in public service from the University of Massachusetts Amherst.

 

Arthur B. Laffer, Ph.D. has served as a member of our board of directors since December 1998. Dr. Laffer has been chairman of Laffer Associates, an economic research and financial consulting firm, since 1979; chief executive officer of Laffer Advisors Inc., a broker-dealer, since 1981; and chief executive officer of Laffer Investments, an investment management firm, since 1999. Dr. Laffer presently serves on the boards of directors of the following publicly traded companies: PETCO Animal Supplies, Inc., Mastec Inc., Nicholas Applegate Growth Fund, Oxigene, Inc., MPS Group, Inc. and Veolia Environment. Dr. Laffer is a 1963 graduate of Yale University. Dr. Laffer received his M.B.A. in 1965 and his Ph.D. in economics in 1972, each from Stanford University.

 

65


Table of Contents

Peter J. McLaughlin joined our board of directors in September 2003. Mr. McLaughlin is currently the associate director of principal gifts for Boston College, a position he has held since September 2002. From September 1999 through August 2002, he was the managing director of Bernheimer Associates, a merger and acquisition firm concentrating on representing companies for sale in the direct marketing and direct mail businesses. From March 1996 through August 1999, he served as the executive vice president of corporate development for Vestcom International, a document management business. Mr. McLaughlin has served in a number of other senior management positions with various companies, including senior vice president of First Image Management Company, chief executive officer of Micrographics Systems, and president and chief executive officer of Alves Photo. Mr. McLaughlin received an M.B.A. from Northeastern University and an A.B. in economics from Boston College.

 

James M. Myers joined our board of directors in November 2003 and currently services as the chairman of our audit and corporate governance committee. Mr. Myers is currently the chief executive officer of PETCO Animal Supplies, Inc., a publicly traded company which he joined in May 1990. Mr. Myers became chief executive officer of PETCO in March 2004. From 1998 to 2004, Mr. Myers served as executive vice president and chief financial officer of PETCO. From 1996 to 1998, Mr. Myers served as senior vice president, finance and before that as vice president, finance and as vice president and controller of PETCO. From 1980 to 1990, Mr. Myers held various positions at the accounting firm of KPMG LLP, including senior audit manager. Mr. Myers also presently serves on the board of directors of PETCO. Mr. Myers earned a certified public accountant and received an accounting degree from John Carroll University.

 

Jordanna Schutz joined our board of directors in September 2003. From May 1999 through December 1999, Ms. Schutz served as director of development of Bluemountain.com, an Internet electronic greeting card website. Bluemountain.com was sold to Excite@Home in December 1999. Ms. Schutz was a full-time student at Harvard University from September 1998 until June 2003, other than the time she spent at Bluemountain.com. While a student at Harvard, she pursued physical chemistry research in the area of nanotechnology and served on the student executive council of the Technology and Entrepreneurship Center at Harvard. She received a B.A. in physics and math from Harvard in 2003.

 

On October 3, 2003, Ms. Kathleen Connell was elected to our board. At that time, Ms. Connell served as the president of Connell Group, an investment advisory firm, and from January 1995 through January 2003, she served as the controller for the State of California. She attended her first board and audit committee meetings on October 27, 2003, at which time she was appointed to the audit committee of our board of directors. A special meeting of the board was held on October 28, 2003 by teleconference, which she also attended.

 

Following a discussion with two of our directors on November 3, 2003 in which Ms. Connell’s resignation from the board was requested, Ms. Connell submitted her resignation in a letter dated November 5, 2003 (which her counsel claimed in a letter dated November 10 she had decided to submit prior to our November 3 request). When the two directors requested Ms. Connell’s resignation, they offered a severance payment of $25,000, an amount equal to our annual director’s retainer fee. Consistent with our historical employee severance practices, we also offered to execute a mutual release and non-disparagement agreement.

 

In her resignation letter, Ms. Connell referred to a separate letter to our board of directors in which she states that she had raised at the October 27 board and audit committee meetings and thereafter a series of questions regarding the company. In her separate letter, which was also dated November 5, 2003, Ms. Connell identified the following as matters that should receive further review by our board, and expressed her opinion that the process by which these matters had been addressed was not consistent with what is expected of a publicly traded company:

 

    full compliance with spirit, as well as the technical requirements of Sarbanes-Oxley;

 

    the methodology for determining executive compensation;

 

66


Table of Contents
    the limited information presented to the audit committee at its meeting regarding September financials;

 

    the need to expand the role and oversight of the audit committee;

 

    the importance of succession planning; and

 

    the commitment of senior executives to the company following exercise of their options.

 

On November 6, following our receipt of Ms. Connell’s November 5 letters, we withdrew our offers of the director’s retainer and a mutual release and non-disparagement agreement, and directed members of the securities litigation group of Clifford Chance US LLP to investigate the matters raised in the letters. In the course of the investigation, they interviewed all the directors present at the meetings other than Ms. Connell, who, through her counsel, declined to speak or meet with us or our investigating counsel. In addition, our investigating counsel interviewed our auditors and outside general corporate counsel, then a member of Clifford Chance US LLP, who were present at the meetings. Our investigating counsel also reviewed relevant corporate records and documents, including documents relating to the October 27 and 28 board and committee meetings and the matters raised in Ms. Connell’s letters.

 

On November 14, 2003, our board of directors received a detailed, oral presentation on the investigation covering each of the areas of concern identified by Ms. Connell. Our board then asked questions of investigating counsel, participated in a discussion and considered what actions, if any, should be taken as a result of the investigation and report. The board unanimously concluded that the investigation had been thorough and that the company’s processes for addressing the matters raised by Ms. Connell were adequate. While the board was satisfied with the results of the investigation and concluded that no further investigation was required, the board also acknowledged the importance of the matters discussed at the meeting and unanimously resolved to continue to focus on them.

 

Board Composition

 

Our board of directors currently consists of eight members—Messrs. Strauss, Citron, Dangoor, Kennedy, McLaughlin and Myers, Ms. Schutz and Dr. Laffer. Our directors, other than Mr. Strauss, are not, and have never been, employees of our company or any of our subsidiaries. Each of Messrs. Dangoor, Kennedy, McLaughlin and Myers are independent directors, or Independent Directors, as defined by Rule 4200(a)(14) of the National Association of Securities Dealers listing standards.

 

Our restated bylaws provide that the authorized number of directors, which is currently nine, may be changed only by a resolution adopted by at least a majority of our directors then in office or by holders of at least a majority of our outstanding shares represented at our annual meeting of stockholders. Any additional directorships resulting from an increase in the number of directors may only be filled by the directors.

 

Board Committees

 

Our board of directors has established an executive committee, an audit and corporate governance committee, a compensation committee and a nominating committee.

 

Executive Committee.    The executive committee currently consists of Messrs. Citron and Strauss and Dr. Laffer. The executive committee assists our board of directors in the management of our business and affairs with the powers and authority of our board of directors as directed by our board.

 

Audit and Corporate Governance Committee.    The audit and corporate governance committee consists of Messrs. Myers (chairman), Dangoor and McLaughlin, each of whom are Independent Directors. The audit and corporate governance committee is a standing committee of, and operates under a written charter adopted by, our board of directors. The audit and corporate governance committee reviews and monitors our financial statements and accounting practices, appoints, determines funding for, and oversees our independent auditors, reviews the

 

67


Table of Contents

results and scope of the audit and other services provided by our independent auditors, and reviews and evaluates our audit and control functions. The audit and corporate governance committee also assists the board of directors in developing and recommending to our board corporate governance guidelines and by providing oversight with respect to corporate governance and ethical conduct. Mr. Myers is our audit committee financial expert under SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002.

 

Compensation Committee.    The compensation committee consists of Messrs. Dangoor (chairman) and McLaughlin, each of whom are Independent Directors. The compensation committee makes decisions and recommendations regarding salaries, bonuses, benefits and incentive compensation for our directors and executive officers and administers our incentive compensation and benefit plans, including our 2003 Stock Incentive Plan and our 2003 Employee Stock Purchase Plan.

 

Nominating Committee.    Our nominating committee consists of Messrs. Kennedy (chairman) and Dangoor, each of whom are Independent Directors. The nominating committee assists the board of directors in fulfilling its responsibilities by:

 

    identifying and approving individuals qualified to serve as members of our board of directors;

 

    selecting director nominees for our annual meetings of stockholders; and

 

    evaluating our board’s performance.

 

Other Committees.    Our board of directors may establish other committees as it deems necessary or appropriate from time to time.

 

Compensation Committee Interlocks and Insider Participation

 

Our compensation committee currently consists of Messrs. Dangoor and McLaughlin. Neither member of our compensation committee serves or has served as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving on our compensation committee.

 

In fiscal 2003, our compensation committee consisted of Messrs. Kennedy and Jared Schutz Polis, our former secretary and a former director, and Dr. Laffer. Neither Mr. Kennedy nor Dr. Laffer is currently an officer or employee of our company. Mr. Polis was our corporate secretary during fiscal 2003. Mr. Polis is also the managing member of JPS International LLC which is the general partner of Internet Floral Concepts, L.P. We have entered into various transactions with JPS International LLC and Internet Floral Concepts, L.P. as well as various transactions with Dr. Laffer. See “Related Party Transactions.” In 2003, Mr. Polis, one of our former directors, Mr. Citron, the chairman of our board of directors, Dr. Stephen Schutz, one of our former directors, Dr. Laffer, one of our directors and a former member of our compensation committee, and Ms. Schutz, a current director, each served as a member of the board of directors of Jovian Holdings, Inc., a wholly owned subsidiary of JPS International LLC, one of our stockholders, which is the investment advisory and decision making entity for JPS International LLC, our stockholder Internet Floral Concepts, L.P. and for the shares of our common stock held by Mr. Polis. Mr. Citron is also the president and chief executive officer of Jovian Holdings, Inc. Mr. Citron has entered into an employment agreement with Jovian Holdings, Inc. under which, as consideration for Mr. Citron’s services as president and chief executive officer and for the appreciation in value of a portfolio of securities held by JPS International LLC and its affiliates, Jovian Holdings, Inc. is obligated to pay him 6% of any distributions on or proceeds from the sale of shares of our capital stock held by JPS International LLC, Internet Floral Concepts, L.P. or Mr. Polis above a predetermined valuation, as well as 6% of the aggregate appreciation in the fair market value, if any, of such shares above the predetermined valuation. JPS International LLC, paid Mr. Citron a $750,000 fee upon completion of our initial public offering.

 

68


Table of Contents

Compensation of Directors

 

We currently pay Mr. Citron, the chairman of our board of directors, a monthly retainer and fixed reimbursement compensation of $11,000 to serve as the chairman of our board of directors, which includes all expenses incurred by Mr. Citron on our behalf except for airfare, transportation and hotels for which we separately reimburse Mr. Citron.

 

In April 2003, we agreed to pay Mr. Kennedy and Dr. Laffer each an annual retainer of $25,000 to serve as directors for the fiscal year 2004.

 

We also granted options to purchase shares of our common stock to members of our board of directors prior to our initial public offering.

 

We pay our non-employee board members the following fees related to their service on our board of directors, assuming they attend at least 75% of the meetings of our board of directors or the committees on which they are members:

 

    annual retainer of $25,000;

 

    per committee meeting $1,000; and

 

    annual retainer for serving as board committee chairman of $5,000.

 

In the event that a non-employee board member attends less than 75% of such meetings, the board member would receive 50% of the cash compensation he or she would otherwise receive. Mr. Citron has indicated that he will decline these payments.

 

We also promptly reimburse our non-employee directors for reasonable expenses incurred to attend meetings of our board of directors or its committees.

 

We do not currently pay our employee director cash compensation for his service as a member of our board of directors, but we do reimburse him for the reasonable expenses of attending meetings of the board of directors or committees.

 

Under our 2003 Stock Incentive Plan, in December 2003, we granted an option to purchase 10,000 shares of our common stock to each of Messrs. Citron, Dangoor, Kennedy, McLaughlin, and Myers, Dr. Laffer and Ms. Schutz. In addition, we will grant an option to purchase 10,000 shares of our common stock to each person who first becomes a non-employee member of our board of directors on the date that person joins our board of directors, provided that person has not previously been employed by us or any parent or subsidiary corporation. Finally, on the date of each annual stockholders’ meeting beginning in 2004, we will grant each non-employee member of our board of directors an option to purchase 2,500 shares of common stock, provided such individual has served as a non-employee member of the board of directors for at least six months.

 

In addition, to the extent that we elect to provide additional incentive to our board of directors, we may provide each non-employee board member with the opportunity to apply all or a portion of fees for board service to the acquisition of a below-market option grant. The option grant would automatically be made on the first trading day in January in the year for which the fee would otherwise be payable in cash. The number of shares subject to the option will be determined by dividing the reduction amount by two- thirds of the fair market value per share on the grant date. The exercise price per share will be equal to one-third of that fair market value. As a result, the difference between the fair market value of the option shares on the grant date and the aggregate exercise price payable for those shares will be equal to the amount of fees invested in that option.

 

In June 2002, we entered into a letter agreement with Mr. Citron, which provided for specified payments in the event we were acquired by merger or as a result of a sale of substantially all of our assets. In October 2003,

 

69


Table of Contents

our compensation committee approved the implementation of a deferred compensation arrangement to supersede this letter agreement, effective upon our initial public offering, subject to a minimum of $1.25 million. Our other non-employee board members may be designated as eligible to participate in our deferred compensation plan.

 

For a detailed description of our benefit plans, please see “Employee Benefit Plans.”

 

Indemnification of Directors and Executive Officers and Limitation of Liability

 

Our amended and restated certificate of incorporation provides that we will indemnify our directors, officers and employees to the fullest extent permitted by Delaware law, and that our directors will not be personally liable for monetary damages to us or our stockholders for any breach of fiduciary duties to the fullest extent permitted by Delaware law.

 

Similarly, our restated bylaws provide that we will indemnify our directors, officers and employees to the fullest extent permitted by Delaware law. We are also empowered under our restated bylaws to enter into indemnification agreements with our directors, officers, employees and agents and to purchase insurance on behalf of any person we are required or permitted to indemnify. We have entered into indemnification agreements with each of our current directors and executive officers which may, in some cases, be broader than the specific indemnification provisions contained in Delaware law. Similarly, we will enter into such indemnification agreements with each of our future directors and executive officers.

 

At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification by us will be required or permitted and we are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.

 

We have an insurance policy covering our directors and officers with respect to specified liabilities, including liabilities arising under the Securities Act, or otherwise.

 

Executive Compensation

 

Summary of Cash and Other Compensation

 

The following table shows all compensation received during the year ended June 30, 2003 by our chief executive officer and the four other most highly compensated executive officers whose salary and bonus in such fiscal year for services rendered in all capacities to us during such fiscal year exceeded $100,000. These individuals are referred to as the “named executive officers.” The compensation described in this table does not include medical, group life insurance or other benefits which are available generally to all of our salaried employees.

 

70


Table of Contents

Summary Compensation Table

 

     Annual Compensation

   Long-Term
Compensation


  

All Other
Compensation(1)


     Salary

   Bonus

   Securities
Underlying
Options


  

William Strauss

   $ 364,519    $ 248,310    777,217    —  

Chief Executive Officer and Assistant Secretary

                       

Abraham Wynperle

     244,615      70,000    163,463    —  

President and Chief Operating Officer

                       

Kevin Hall

     222,115      60,000    82,297    —  

Chief Information Officer

                       

Jonathan Sills

     169,808      40,000    82,297    —  

Senior Vice President, Strategy and Corporate Development

                       

Mark Sottosanti

     133,004      40,000    65,837    —  

Vice President, Planning and Logistics

                       

(1)   In accordance with the rules of the SEC, the other annual compensation described in this table does not include various perquisites and other personal benefits received by our named executive officers that do not exceed, in the aggregate, the lesser of $50,000 or 10% of any such officer’s salary and bonus disclosed in this table.

 

Option Grants and Aggregated Option Exercises in the Last Fiscal Year

 

No options were granted or exercised by the named executive officers during the fiscal year ended June 30, 2003.

 

Fiscal Year End Option Values

 

The following table shows information concerning the number and value of unexercised options held by each of the named executive officers listed in the summary compensation table above at June 30, 2003. Options shown as exercisable in the table below are immediately exercisable. However, we have rights to repurchase shares of the common stock underlying some of these options upon termination of the holder’s employment with us. There was no public trading market for the common stock as of June 30, 2003. Accordingly, the value of unexercised in-the-money options listed below at June 30, 2003 has been calculated on the basis of the fair market value of our common stock as determined by our board of directors of $11.39 per share, less the applicable exercise price per share, multiplied by the number of shares underlying such options.

 

Name


   Number of Securities Underlying
Unexercised Options at
June 30, 2003


   Value of Unexercised
In-the-Money Options at
June 30, 2003


   Exercisable

   Unexercisable

   Exercisable

   Unexercisable

William Strauss

   777,217    —      $ 8,350,673    —  

Abraham Wynperle

   163,463    —        1,613,820    —  

Kevin Hall

   82,297    —        812,500    —  

Jonathan Sills

   82,297    —        812,500    —  

Mark Sottosanti

   65,837    —        650,000    —  

 

71


Table of Contents

Employee Benefit Plans

 

2003 Stock Incentive Plan

 

Our 2003 Stock Incentive Plan is the successor program to our 1998 Stock Option/Stock Issuance Plan and our 1999 Stock Option/Stock Issuance Plan. All outstanding options under the predecessor 1998 and 1999 plans have been transferred to our 2003 plan, and no further option grants will be made under those predecessor plans. The transferred options will continue to be governed by their existing terms, unless our compensation committee elects to extend one or more features of our 2003 plan to those options. Options granted under our 2003 plan are generally non-transferable other than by will or the laws of inheritance or certain transfers for tax or estate planning purposes.

 

As of March 31, 2004, there were 4,243,828 shares of our common stock reserved for issuance under our 2003 plan. The number of shares of our common stock reserved for issuance under our 2003 plan is subject to adjustment in connection with any stock split, stock dividend, recapitalization, combination of shares or similar change affecting our outstanding common stock. The number of shares of common stock available for issuance under our 2003 plan will automatically increase on the first trading day in January of each calendar year, beginning in calendar year 2004, by an amount equal to the lesser of (i) 3% of the total number of shares of our common stock outstanding on the last trading day in December of the preceding calendar year, (ii) 625,000 shares or (iii) such amount as our board may determine.

 

No participant in our 2003 plan may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances for more than 500,000 shares of our common stock in the aggregate per calendar year.

 

Our 2003 plan is divided into five separate components:

 

    the discretionary option grant program, under which eligible individuals in our employ or service may be granted options to purchase shares of common stock at an exercise price not less than 100% of the fair market value of those shares on the grant date;

 

    the stock issuance program, under which such individuals may be issued shares of common stock directly, through the purchase of such shares at a price not less than 100% of their fair market value at the time of issuance or as a bonus tied to the attainment of performance milestones or the completion of a specified period of service;

 

    the salary investment option grant program, under which our executive officers and other highly compensated employees may be given the opportunity to apply a portion of their base salary to the acquisition of special below-market stock option grants;

 

    the automatic option grant program, under which option grants will automatically be made at periodic intervals to our non-employee board members to purchase shares of common stock at an exercise price equal to 100% of the fair market value of those shares on the grant date; and

 

    the director fee option grant program, under which our non-employee board members may be given the opportunity to apply a portion of the annual fees otherwise payable to them in cash each year to the acquisition of special below-market option grants.

 

Eligibility.    Non-statutory stock options, stock appreciation rights or stock awards may be granted under our 2003 plan to employees, directors and consultants of ours, our affiliates and subsidiaries. Incentive stock options may be granted only to employees of ours or any future subsidiaries.

 

Discretionary Option Grant and Stock Issuance Programs.    The discretionary option grant program and the stock issuance program are administered by the compensation committee. This committee, in its discretion, determines which eligible individuals are to receive option grants or stock issuances under those programs, the

 

72


Table of Contents

time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws, and the terms and conditions of each award including, without limitation, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding, provided that no option term may exceed 10 years measured from the date of grant. The committee, in making its determination, may consider the compensation awarded to directors and officers at other companies, our corporate performance, the individual’s performance and any other factors the committee deems appropriate.

 

Vesting of any option grant or stock issuance is contingent on continued service with us. Upon the cessation of an optionee’s service, any unvested options granted under the discretionary option grant program will terminate and will be forfeited. Any vested but unexercised options (i) will terminate immediately if the optionee is terminated for misconduct, or (ii) if the cessation of service is other than for misconduct, will remain exercisable for such period of time as determined by the compensation committee at the time of grant and set forth in the documents evidencing the option. The compensation committee has the discretion, however, at any time while the option remains outstanding to (i) extend the period of time that the option may be exercisable following the cessation of an optionee’s service (but not beyond the term of the option) and (ii) permit the optionee to exercise following a cessation of service options that were not vested at the time of the cessation of service.

 

If a participant’s service with us ceases while shares issued under the discretionary grant or stock issuance programs remain unvested, or if any performance objectives are not met, then those shares will be surrendered immediately to us, and cancelled. If any consideration was paid by the participant for such shares, we will repay the participant the lower of (i) the cash consideration paid for the surrendered shares, or (ii) the fair market value of the surrendered shares at the time of cancellation. The compensation committee has the discretion, however, to waive any surrender and cancellation that otherwise would occur upon the cessation of the participant’s service or the non-attainment of the applicable performance objectives. This will result in the immediate vesting of those shares to which the waiver applies. Such a waiver may occur at any time before or after the cessation of the participant’s service or the attainment or non-attainment of the applicable performance objectives.

 

The exercise price for the shares of common stock subject to option grants made under our 2003 plan may be paid in cash or in shares of common stock valued at fair market value on the exercise date. Subject to applicable law, the option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, subject to applicable law, the plan administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise or purchase.

 

The compensation committee will have the authority to cancel outstanding options under the discretionary option grant program, including options transferred from the 1998 and 1999 plans, in return for the grant of new options for the same or a different number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date.

 

Stock appreciation rights are authorized for issuance under the discretionary option grant program. Such rights will provide the holders with the election to surrender their outstanding options for an appreciation distribution from us equal to the fair market value of the vested shares of common stock subject to the surrendered option, less the aggregate exercise price payable for those shares. Such appreciation distribution may be made in cash or in shares of common stock. None of the outstanding options under our 1998 or 1999 plans contain any stock appreciation rights.

 

In the event that we are acquired by a merger, a sale by our stockholders of more than 50% of our outstanding voting stock or a sale of all or substantially all of our assets, the vesting of each outstanding option

 

73


Table of Contents

under the discretionary option grant program will automatically accelerate in full except to the extent that such option (i) will be assumed by the successor corporation or otherwise continued in effect or (ii) will be replaced with a cash incentive program of a successor corporation of the type described in the 2003 plan. In addition, in such event all unvested shares under the discretionary option grant and stock issuance programs will immediately vest, except to the extent (i) our repurchase rights with respect to those shares are to be assigned to the successor corporation or otherwise continue in effect, or (ii) accelerated vesting otherwise is precluded by other limitations imposed at the time of grant. However, the compensation committee will have complete discretion to structure any or all of the options under the discretionary option grant program so those options will immediately vest in the event we are acquired, whether or not those options are assumed by the successor corporation or otherwise continued in effect. Alternatively, the compensation committee may condition such accelerated vesting upon the subsequent termination of the optionee’s service with us or the acquiring entity. The vesting of outstanding shares or share rights under the stock issuance program may also be accelerated upon similar terms and conditions.

 

The compensation committee may grant options and structure repurchase rights so that the shares subject to those options or repurchase rights will vest in connection with a hostile takeover, whether accomplished through a tender offer for more than 50% of our outstanding voting stock or a change in the majority of our board of directors through one or more contested elections for board membership. Such accelerated vesting may occur either at the time of such hostile takeover or upon the subsequent termination of the individual’s service. The vesting of outstanding shares or share rights under the stock issuance program may also be accelerated upon similar terms and conditions.

 

All of the options and unvested shares transferred from our 1998 and 1999 plans will immediately vest in the event we are acquired by a merger, a consolidation in which more than 50% of our outstanding stock is transferred, a sale of substantially all our assets or, in the case of our 1998 plan, a tender offer or exchange offer in which the offeror acquires at least 15% of our outstanding voting stock, unless those options are assumed by the acquiring entity or our repurchase rights with respect to any unvested shares subject to those options are assigned to such entity.

 

We intend that any compensation deemed paid by us in connection with the exercise of options granted under the discretionary option grant program for the disposition of the shares purchased under those options will be regarded as “performance-based,” within the meaning of Section 162(m) of the Internal Revenue Code, and that such compensation will not be subject to the annual $1 million limitation on the deductibility of compensation paid to covered executive officers which otherwise would be imposed pursuant to Section 162(m).

 

Salary Investment Option Grant Program.    The compensation committee will have the exclusive authority to select the executive officers and other highly compensated employees who may participate in the salary investment option grant program in the event that program is activated for one or more calendar years. The committee, in making its selections, has the sole and exclusive authority over which individuals to include. In the event the compensation committee elects to activate the salary investment option grant program for one or more calendar years, each of our executive officers and other highly compensated employees selected for participation may elect, prior to the start of the calendar year, to reduce his or her base salary for that calendar year by a specified dollar amount not less than $10,000 nor more than $50,000. Each selected individual who files such a timely election will automatically be granted, on the first trading day in January of the calendar year for which his or her salary reduction is to be in effect, an option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of our common stock on the grant date. The option will be exercisable at a price per share equal to one-third of the fair market value of our common stock on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the amount by which the optionee’s salary is reduced under the program. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the salary reduction is to be in effect, contingent on continued service with us. If a participant ceases service with us for any reason, any vested

 

74


Table of Contents

but unexercised option will be exercisable until the earlier of (i) the expiration of the ten-year option term, or (ii) three years measured from the date of cessation of service.

 

The remaining terms of each option granted under the salary investment option grant program are the same as the terms in effect for option grants made under the discretionary option grant program.

 

Automatic Option Grant Program.    Under the automatic option grant program, each individual who first becomes a non-employee board member at any time the effective date of the 2003 plan will receive an automatic option grant to purchase 10,000 shares on the date such individual joins our board of directors, provided that such individual has not been in our prior employ. In addition, on the date of each annual stockholders meeting held thereafter, each non-employee board member who is to continue to serve as a non-employee board member will automatically be granted an option to purchase 2,500 shares of our common stock, provided such individual has served on our board for at least six months.

 

The automatic grants will have an exercise price per share equal to the closing selling price per share of our common stock on the grant date. Each automatic grant will have a term of 10 years, subject to earlier termination following the optionee’s cessation of board service. Each option will be immediately exercisable for all of the option shares; however, we may repurchase, at the lower of the exercise price paid per share and the fair market value of the shares at the time of repurchase, any shares purchased under the option which are not vested at the time of the optionee’s cessation of board service. The shares subject to each initial 10,000-share automatic option grant will vest in a series of four successive annual installments upon the optionee’s completion of each year of board service over the four-year period measured from the grant date. The shares subject to each annual 2,500-share automatic option grant will vest upon the optionee’s completion of one year of board service measured from the grant date. Any vested but unexercised option will be exercisable for a period of twelve months following the cessation of the optionee’s board service. However, the shares subject to each automatic option grant will immediately vest in full upon the optionee’s death or disability while a board member.

 

The remaining terms of each option granted under the automatic option grant program are the same as the terms in effect for option grants made under the discretionary option grant program.

 

Director Fee Option Grant Program.    Should the director fee option grant program be activated for any future calendar year, each non-employee board member will have the opportunity to apply all or a portion of any cash fee for board service for such year to the acquisition of a below-market option grant. The option grant will automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of our common stock on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the portion of the retainer fee applied to that option. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the fee election is to be in effect, contingent on continued board service. If an optionee ceases board service for any reason, any vested but unexercised option will be exercisable until the earlier of (i) the expiration of the ten-year option term, or (ii) three years measured from the date board service ceased. However, any unvested option will become immediately exercisable for all the option shares upon the optionee’s death or disability while serving as a board member.

 

The remaining terms of each option granted under the director fee option grant program are the same as the terms in effect for option grants made under the discretionary option grant program.

 

Our 2003 plan also has the following features:

 

   

Outstanding options under the salary investment, automatic option and director fee option grant programs will immediately vest and become exercisable in full if we are acquired by a merger, a sale by

 

75


Table of Contents
 

our stockholders of more than 50% of our outstanding voting stock or a sale of substantially all our assets, or if more than 50% of our outstanding voting stock is acquired through a hostile tender offer or a change in the majority of our board of directors occurs as a result of one or more contested elections.

 

    Limited stock appreciation rights will automatically be included as part of each grant made under the salary investment, automatic and director fee option grant programs, and these rights may also be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with this feature may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per